Options vs Futures

lindq said:
Gosh, buying an index with home equity makes a lot of sense. Because as we all recall from 2006-2009, the stock market and the housing market never crash together.

Duh.
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What happened in 2006-2009 was an outlier in the history of home ownership. I know. I had heated arguments with family to convince them NOT to buy a home and had almost damaged valuable relationships if not for a crash. Besides, what happened was extreme leverage and concentration in the same asset.

Now take that outlier away and you are simply matching the best liability (h.e.) with the best asset (equities) available to people. It's Capital Budgeting 101. Obviously moderation is in order. And if you can produce reliable Sharpe ratios or predictable drawdowns, then it's time to back the truck up (at the start of a business cycle).
 
I disagree with the above. There are a couple of reasonable ways to get leverage on a stock using options.

A synthetic will give you about 5x leverage. Go out to May or July. Buy some at-the-money calls--I guess that would be the 44 strike calls right now. Then sell an equal number of 44 strike puts. When the short puts become nearly worthless, take off the whole position. If you want to continue, go out a few more months and then do the same thing again at the money. Have a mental stop somewhere unless you want to get the stock put to you in case things don't go your way.

Alternatively, you can buy some deep-in-the-money calls. Maybe the July 35 or something like that. The bid-ask spread is not that good, but if you are so sure the stock is going to move a lot, that's a small price to pay.

Since you have conviction about the stock, don't use any spreads or anything else that cuts off your upside.
 
Well, here is the thing with options. Do you predict volatility accurately? Will you have a drag on returns or perhaps enhance returns?

Options for the sake of leverage alone is not the way to go. The change in optionality over time and with changes in underlying makes your amount of leverage very imprecise.

So the new question is: Are you increasing or decreasing leverage at the right time?

It's a big increase in complexity. We don't know what the OP's original strategy is, but he should take that into account. I just want to highlight these considerations. At the end of the day a few more points in Gamma won't affect my one-lot trade. : P But done repetitively over time, it will add up to a drag or enhancement.

Index fund managers enhance their returns with futures. The big worry is basis risk, which is too miniscule to trade or worry about for most people. Except maybe when you trade futures to expiration. You don't usually do that unless your trading a few mil or so.
 
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xandman said:
Well, here is the thing with options. Do you predict volatility accurately? Will you have a drag on returns or perhaps enhance returns?
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Agreed, that is why I have illustrated 2 ways of removing volatility from consideration and turning it into a purely directional trade (with some leverage).
 
An Option implies a certain dispersion of prices over a time... implied volatility... This is just the markets view of how much the stock will move.. If you buy outright direction with a call or a put you can literally buy the right direction and still lose money.. the call cost more then the stock moved in that direction. A call is a very good way to gain leverage without downside risk. yes you can lose your entire premium.. but 1 call option gives you the potential of control over 100 shares of stock.. I think anyone trading in options should read like 3 or 4 books on the matter. then come to this forum for clarification.. It seems that one would have to be very long winded to explain the nuances.. They aren't that complex..
 
cdcaveman said:
An Option implies a certain dispersion of prices over a time... implied volatility... This is just the markets view of how much the stock will move.. If you buy outright direction with a call or a put you can literally buy the right direction and still lose money.. the call cost more then the stock moved in that direction. A call is a very good way to gain leverage without downside risk. yes you can lose your entire premium.. but 1 call option gives you the potential of control over 100 shares of stock.. I think anyone trading in options should read like 3 or 4 books on the matter. then come to this forum for clarification.. It seems that one would have to be very long winded to explain the nuances.. They aren't that complex..
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Hey CD, long time no hear. Nice to see you back.
 
You have to buy a call with no time value in it to get rid of the volatility issue. For example, I just purchased an IWM Apr 112 strike for $11.35. IWM is $123.10. What is the time value in this call? 0.25. This call will largely behave like the underlying. The delta is about 0.91.
 
contrary to what you may think, it takes more money trading options than futures...a paradox, that flies in the face of conventional wisdom. First to carry positions of short options (the edge) you will be asked to post a lot margin. Sure they let you buy them but the premium is fat and it is always priced so the locals make out. Futures are a little different. My preference is spreads on futures or spreads on options.
 
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If you are buying near the money I wouldn't worry all that much about IV. The thought of buying any option contract makes me sick but hey to each his own. If you buy jun ntm's the theta won't be that big of a deal for while.
 
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