Simple Option strategy - input requested

[misterkel]

It seems to me that buying deep in the money options (call or put) with no premium, but just after the ones with premium would be a long-term winning strategy.
Why? A move in favorable direction would be at Delta - 1 while a move in the other direction would decrease delta, so the same quantity of move would create a greater gain to upside (of the option, not the stock) than it would cause a loss to the downside, especially with a decent move.
In other terms, the gain in premium would mitigate the loss, given enough time for time value to matter.

(It seems the same as the GUTS strategy, only directional, hence with enhanced profit/loss. But perhaps the GUTS would be truly lossless, except for opening/closing fees. Of course, it would be far slower to gain, probably netting a loss with the fees on most ocassions.)

What timeframe would be best for expirations?
What would be ideal enter / exit criteria? Exit at Strike hits underlying on loss side, I think. Exit at option price doubles on upside.

Thinking enter Monday with expiry following Friday, hold through Wed/ maybe Thursday. Mid-volatility - >20% or low-price underlying >$50.

Why wouldn't this directional strategy work for a small percentage edge of gains over losses? Would the spreads be the primary killer? ITM spreads can be a dealbreaker.

 

[stepandfetchit]

Seems you may have observed something, that prompted this thought process. Without observing what prompted this, any comments from me would be WAGs. Pricing errors (my take on your comments) may not be actionable unless adequate market exists (adequate volume {or at least open interest and time})! -- initial though seems to imply huge capital would be required followed by a miracle to be profitable (as inferred above, a WAG)

 

[ironchef]

I don't think there is a free lunch here.

In a way it is like buying stocks on margins. ITM, your "margin" cost is commissions + bid/ask. You have to calculate on a case by case basis whether it is more/less expensive than margins. Often it is more expensive than margin interests.

One advantage over margins is you do not have margin calls if your bet is wrong. Disadvantage? In my case, for thinly traded, usually when I had to exit, I paid a little less than intrinsic and when I entered I bought closer to ask.

 

[Oysteryx]

Buying deep ITM puts (@ delta close to -1) is simil to go short the underlying with a slightly asymmetric payoff, providing more downside (if underlying goes up) than upside (if underlying goes down); such asymmetry is compensated by the premium received. No edge there.

IMHO retail should (in most cases) not be trading options - the informational, pricing and quantitative chasm between institutional and retail is amplified tenfold when dealing with options.

 

[ironchef]

IMHO retail should not be trading options - the informational, pricing and quantitative chasm between institutional and retail is amplified tenfold when dealing with options.

No hope for us retail option traders? How can I improve my odds?

Do you think it is harder than day trading?

Best wishes.

 

[Oysteryx]

No hope for us retail option traders? How can I improve my odds?

Do you think it is harder than day trading?

Best wishes.

LOL. A Bloomberg platform would be a great start. No, I do not think so

 

[Handle123]

I think options is the last area left for retail to do very well, provided they have a clue of one or both ways to trade them either delta neutral or directional. I only do directional and have them automated now, so it is yawn and forget them.

 

[JackRab]

If you can manage to buy a deep ITM option at intrinsic value only... than that would be a good thing, but I doubt you can actually do that.

Options are priced on the underlying stock, and therefore are less liquid... and deep ITM's are even less liquid then ATM/OTM, since the risk of quoting is bigger... which means the spread is wider and there will be less interest in trading them.

For you, that would mean you would have to cross the spread and pay more than true intrinsic value... For instance, if a stock is trading 100.00/100.03 (bid/ask)... the 60 call would be quoted wider than 3 cents, something like 39.90/40.15... maybe even wider...

So if you would buy that call... depending on some other factors, you might end up having to pay (close to) the offer, which is 12 cents higher than the spot offer. That is 12 cents profit for the market maker, and theoretically a 12 cents loss for you... might not seem like a lot.. but it adds up.

Also, put/call parity means when you buy that call at 12 cents above intrinsic, you are basically pricing it at 12 cents premium... and you would probably be able to buy the 60 put at a cheaper price than that... which would mean you're cheaper off with buying the 60-put at say 4 cents (or even 1 cent, theoretically that put wouldn't be worth much, if anything) and buying the stocks... that way you have exactly the same position as buying the 60-call... but cheaper.

And that would also be the 'free lunch' @ironchef, if you are able to buy the 60 call at intrinsic value... in this case 40.03... (equals the offer of the stock)... than you basically have bought the stock at 100.03 and you have gotten the 60-put for free... so a free put

 

[ironchef]

And that would also be the 'free lunch' @ironchef, if you are able to buy the 60 call at intrinsic value... in this case 40.03... (equals the offer of the stock)... than you basically have bought the stock at 100.03 and you have gotten the 60-put for free... so a free put

Actually I was only able to sell at less than intrinsic but had to buy way above intrinsic.

For you, that would mean you would have to cross the spread and pay more than true intrinsic value... For instance, if a stock is trading 100.00/100.03 (bid/ask)... the 60 call would be quoted wider than 3 cents, something like 39.90/40.15... maybe even wider...

Unfortunately for thinly traded, quite often wider.

 

[ironchef]

Also, put/call parity means when you buy that call at 12 cents above intrinsic, you are basically pricing it at 12 cents premium... and you would probably be able to buy the 60 put at a cheaper price than that... which would mean you're cheaper off with buying the 60-put at say 4 cents (or even 1 cent, theoretically that put wouldn't be worth much, if anything) and buying the stocks... that way you have exactly the same position as buying the 60-call... but cheaper.

Thanks. I never thought of that angle. How dumb!