Short term directional trades -- ITM, ATM, OTM and expiry?

[jimmyjazz]

I would like to get some clarity on the "best" strike & expiry selections for ~ 1-day trades on long calls and long puts. Previously I was advised that ITM long calls make good sense because of limited exposure to volatility and time decay. That has proven to help my trading, but I haven't tried to quantify things, and haven't explored time to expiry, either. I also never asked the same questions regarding long puts.

So, I have been looking at SPY with an attempt to capture 50% of the 14-day ATR in the underlying. (This would mean that I am currently trying to capture a $1.44 move in SPY.) I have compared equal delta investments (~ 150D) for long calls and puts (75D, 50D, and 25D) at 2 different expiries (OctWk5 and Nov14).

Initial comments:

Gamma -- all positive, always a tailwind
Vega -- all positive (helps long puts, hurts long calls)
Theta -- all negative, always a headwind

Further comments:

-- Theta is a bigger drag the more OTM the option and the shorter time to expiry.
-- Vega has a bigger effect the more OTM the option, and a larger value the more time to expiry.
-- Gamma has a bigger effect the more OTM the option, and a lesser value the more time to expiry.


I am not overly concerned about theta, because most trades close within 1 or 2 days. I don't want to give away the farm, though.

I don't have a good feel for whether or not it is better weight vega over gamma or vice versa. I have the feeling vega is the bigger player, but I can't quantify that. I also don't really know if more or less vega/gamma plays out in terms of the total investment (i.e., as time to expiry increases).

My early thoughts are that I should be trading short-term ITM calls as well as ATM puts, but I am struggling with the decision on expiry for the puts. The longer the expiry, the more $$$ I risk, and I am trading less gamma and more vega.

Any thoughts? Sorry for the length of the post. I can post hard numbers if anyone wants to see them.

 

[oldnemesis]

IMHO: You are completely barking up the wrong tree. If you want to engage in these kinds of trades you should be using futures not options.

 

[jimmyjazz]

I've never traded futures -- can you elaborate?

 

[surfer25]

You are a bit all over the place on your post. If you did post some hard numbers it would be easier to give you some examples using your numbers. The real answer is probably that there is no consistently correct answer. i.e. the correct answer is "It all depends".

Correct choices for options trades depend on so many changing factors that there is no decisive answer to your question that it correct all of the time.

Try posting some hard numbers and perhaps we can comment on your line of reasoning which should help you to further refine your choices for upcoming trades.