Swing Trading buying call options

A

antares66

I know trading call options is not always the best way to make some profits (Time decay, IV, etc.) But guess i would want to try.
My questions:
1. Would it be the better way to buy an ATM call option than a deep ITM option?
ATM options are cheaper because they have no intrinsic value but have a lower delta than ITM options. But couldn´t this be an advantage in case the market goes against you?
The ITM option would lose more because of the higher delta. Or am i wrong?
If the market goes in your favour would the ITM option might gain more because of the higher delta or would the OTM call gain more because of getting intrinsic value?

2. Would you prefer 1 or 2 months till expiration in case of swing trading?
 
I have some experience with this. Here is one issue you will face when trade works out. I have been thru this recently with USO. Say you buy ATM for even 2 months out, so that would be the May expiration. so right now the 20May 74 calls have a measly 7 ct's open interest and 39 cts traded on friday, oh and nasty spread. now let's say things work out well and USO moves to 80, things get even worse. The only way to avoid this is with ticker that trades massive options... like SPY or QQQ.
 
You have 3 factors at play for swing trading with options.
1) Time (entry and exit)
2) price of underlying at entry and exit
3) IV of your option(S) at entry and exit
IFF you are bringing a successful strategy for swing trading underlying's, but are green for trading IV, you may wish to consider synthetic position (Buy the Call and sell the PUT at the same strike) to allow you to "tip-toe" into swing trading with options, as this will keep you mostly immune to IV changes. This may allow you to move your strike to strikes with more liquidity to reduce slippage, which can eat you alive on less liquid options.
 
antares66 said:
I know trading call options is not always the best way to make some profits (Time decay, IV, etc.) But guess i would want to try.
My questions:
1. Would it be the better way to buy an ATM call option than a deep ITM option?
ATM options are cheaper because they have no intrinsic value but have a lower delta than ITM options. But couldn´t this be an advantage in case the market goes against you?
The ITM option would lose more because of the higher delta. Or am i wrong?
If the market goes in your favour would the ITM option might gain more because of the higher delta or would the OTM call gain more because of getting intrinsic value?

2. Would you prefer 1 or 2 months till expiration in case of swing trading?
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Personally, I only buy DITM call and put options. Why? Delta is already higher compared to ATM options. By buying DITM, your call and put options need only to move a little bit to be profitable. Add to that another 3 months till expiration and you put the odds in your favor. Time decay is slower so, if it moves against you, you have plenty of time to cut your losses most times. Let us get real, at times stocks will gap down and you have lost more than usual. However, it does not happen that often enough. I like to put the odds in my favor. Nothing is guaranteed in the stockmarket. Just my 2 cents.
 
smallfil said:
Personally, I only buy DITM call and put options. Why? Delta is already higher compared to ATM options. By buying DITM, your call and put options need only to move a little bit to be profitable. Add to that another 3 months till expiration and you put the odds in your favor. Time decay is slower so, if it moves against you, you have plenty of time to cut your losses most times. Let us get real, at times stocks will gap down and you have lost more than usual. However, it does not happen that often enough. I like to put the odds in my favor. Nothing is guaranteed in the stockmarket. Just my 2 cents.
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I agree. I have heard that some recommend DITM options as a substitute for stocks. You have to invest some amount of money and use the leverage. But possible IV change is still a problem.
 
antares66 said:
I agree. I have heard that some recommend DITM options as a substitute for stocks. You have to invest some amount of money and use the leverage. But possible IV change is still a problem.
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If you go DITM you will not have to worry about IV changes really but IV shoudl be a consideration before buying. If IV is really high you just DITM enought to reduce any time value premium that is inflated.

The money for a DITM option is still cheaper than swing trading the stock and swing trading is not meant to be a day trade. So you can swing trade more stocks using DITM options or even do longer positions.
 
antares66 said:
I agree. I have heard that some recommend DITM options as a substitute for stocks. You have to invest some amount of money and use the leverage. But possible IV change is still a problem.
More...

I do not worry about IV as long as my option trade is aligned with the major trend. Higher volatility will spike the values of your options. Trends persist and last longer than most traders think. And major trends are supported by major institutions including, hedge funds as they themselves set the trends.
 
The liquidity & leverage is in the weekly ATM. That's the best bang for your buck. Much better than futures in terms of leverage. Of course if you're wrong about the direction you are looking at 50-75% losses.
 
To reduce the spread and increase liquidity, go after stocks of high trading volumes. Usually leaders in their sector - which is what you want to trade anyhow.

from there, I go 3-9 months out. I try to stick to 6+. For example, I’m looking for q4 expirations right now.

I select oom calls, with roughly a 35 delta. Never put on more than 1% of your stack, and even then, only if you’re holding 10ish tickers.

be quick to sell your call when losing (e.g. below 20ema, or whatever your stop methods are).

when implied volatility is high historically, I write puts(one month out-weeklies as the IV os always higher) in addition to my calls below my stop out level to deal with the impending vol crush. If it goes below that, I’m out completely. Best of luck trading.
 
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