Swingtrading using Options.

D

dufferdon

Is is credible to swingtrade on a several hours to a few days basis using options rather than the underlying stock or are the spreads just too much of a killer?

There are two reasons for my enquiry. It would appear to avoid the really devastating effect of huge overnight price shocks and because I am uncomfortable trading the size I should now be trading with stocks.
 
You have to remember the basics of options, time decay is your friend (when selling), and will kill you when buying options. If you short first then you will have an automatic edge in your favor over a weekend (even though the floor traders usually price them accordingly). Check the VIX (implied volatility) vs. the Historical before getting too involved.

(trying to help)
 
I do understand options quite well. That's how I built up my account years ago. But then I was looking at a longer time horizon, trading intermediate tops and bottoms on a several weeks basis, using the leverage of options to magnify my results. Is time decay that important an issue for a much shorter term swing trader? Superficially I was much more concerned about bid/ask spreads.
 
in my experience, this will work perfectly well as long as the option is "underpriced" - meaning that it is priced acc to black-scholes, and not priced to what the market may think of the stock (if that helps).

keep in mind the people who write options do it in order to make money...(duh)...:)...in the days of black-scholes you could do this much more easily now, but today, options are priced according to what the stock is most likely to do....something in a strong uptrend will have expensive calls and cheap puts.

ahhh...the days of black-scholes....:)

i only did this over days, and not over hours - over hours the spread will kill you...maybe this will change once they move options off the floor.

since you are familiar trading options, i won't elaborate further. send me a private message if you want to discuss it more.
 
Originally posted by dufferdon
I do understand options quite well. That's how I built up my account years ago. But then I was looking at a longer time horizon, trading intermediate tops and bottoms on a several weeks basis, using the leverage of options to magnify my results. Is time decay that important an issue for a much shorter term swing trader? Superficially I was much more concerned about bid/ask spreads.
More...

The bid/ask spread is obviously how we made money scalping on the trading floor (it still is of course), and we never "straddled" fair value if we could help it...we would make our markets 1 x 100 at a price where we wanted to sell, but had to show a bid within the legal limits...and that is one primary reason why there are very few, if any, stategies that are viable any more.

I have not seen a conversion/reversal market out of whack by more than a nickel in a long, long time (the quote may be, but you can't trade them), so I am interested in seeing some results if you pursue this test.
 
I often will trade options for swing trades where I don't want a lot of exposure for several day or week long positions. Spreads can be a problem. However, here are some observations:

1. You can minimize the time decay aspect by buying options with expiration several months away. It will cost more, but still is only a fraction of what purchasing the actual stock would cost.

2. The deeper in the money the option is, the wider the spread will be. So if you're looking for a substantial move from a stock your best bet is to buy at the money or slightly out of the money options and will give up less on the spread.

The drawback is that options won't move as quickly as the actual stock's movement (except for deep in the money options), so a stock might have to move a dollar or more before you'll make up the spread and be profitable from where you bought it. Options aren't very feasible for daytrading, but for multiday swing trades with high leverage they're terrific.
 
dufferdon,


I think this is a good way to play short term moves in highly liquid stocks. I tend to use mostly credit spreads. Less risk and if the stock does nothing, I make money. Good idea to use a good options broker like Preferred or IB.
 
Originally posted by dufferdon
Is is credible to swingtrade on a several hours to a few days basis using options rather than the underlying stock or are the spreads just too much of a killer?

There are two reasons for my enquiry. It would appear to avoid the really devastating effect of huge overnight price shocks and because I am uncomfortable trading the size I should now be trading with stocks.
More...

Hey Don....Yes you could trade options for hours to a few days ....I have a really great method I use for my own work to write options & create a profit based on certain criteria

Maybe if you see that by me giving you an idea , it will actually bury the hatchet between you & I.........that remains to be seen,,,,,,,Well for xmas, here is your present.....

Personally, I was going to share this on my thread BUT its closed right ?.......BUT I have no problem giving to the ET community anyway.........


I spoke for Traderslibrary.com at thier options forum in Oct in Chicago...........I explained to the group that you could have all the stratagies you want , larry mc millian could come to your homw & give you his expert advice on options & stratagies BUT if you cannot time the market, your wasting your time........If your able to understand how to TIME the market & use options, your 100 steps in front of the world.........


I have not done any writing since 9/11 attacks ...I have just been trading the stocks outright....but plan to get back into option wrting 2002 as part of my trading program.

The game is this......

TIME Is on your side............

Use the current month Option........

Your looking for Stocks that have been correcting on your daily charts ...... & looking for the retracements of 38-50% , into a 20 day ma or 50 day or price resistance

You want to see a minimum premium .30 or higher

You want to have volitile stocks, you want to see them move & have a nice ebb & flow to them....basically you want to avoide dead sideways markets......you want to see a trending stock thats correcting .

Example..........MDT HD FDX PCAR GDT.........ect ect........Look around the 13th of DEC.......all setup nice nice bullflag patterns.........right ? high odds of continuation

You want to see around $2+ away from the strike price........FDX for example was right at its 20 day ma & had 46.70 lows with the 45 strike below.......dont be a dick for a tick basically...you have a clean setup on the 13th-14th.......you have a 45 strike & high odds this goes higher< I traded this stock for swing trade as well as the others so I am able to give you a idea how this works from a recent example of patterns..............my guess is this had a decent premium in it at that time.......say it had 50 bid 60 offer....even if 30 bid - 40 offer dont matter......okay ? make it simple........

You could BUY the stock at 47 for a 50 target..........
$ 3 move minimum...........could do 1000 shares /47,500 & you have a $ 3,000 target at $50.


On Dec 12-14th You could Sell the Dec 45 Puts for for 30 cents for example.........The size is up to you, say you did 100 cts or 10,000 in stock & you get paid 3,000..........

( notice in Nov 28th you had same example setup, was at 44.50 area you would have sold the 42.50 puts if they were available, I am sure had decent premium in them at that time......)

Now...you trade it......if the stock BREAKS & FAILS from the bullflag patterm you kick it out like a normal stop.........thats all.....NOTHING is 100% ..............BUT based on the pattern & based on the trend, you have high odds that you will get a retest back up at the least.........


Note..you are in the middle of the month........you have 10 or les days for expirations..........so you know high odds the stock will go out worthless........right ?..........as the markets work in your favor TIME & TREND Is on your side.............your options on the breakout of the bullflag would be cut in 1/2 at least & you have choice to scale out from that point OR best is to let it expire worthless........so you ...........get it ?

This is how you effectively write options............I would NOT buy them.........EVER......why ? TIME IS AGAINST YOU & YOU DONT KNOW HOW LONG IT WILL TAKE FOR THE TREND TO GET ITS OBJECTIVE & YOU WILL BE A NET LOSER...........Wrting them in a trend is best,,,,,,,,,,


Never write in the money.......meaning if you have a BUY setup.......your at 43.00...NEVER WRITE the 45 puts.......write the 40's.........you want to be away from the strike...........

Rememeber if the stock stays away from your strike on expiration you get paid...........


So in this example.........You where paid 3,000 on your 3,000 worth of stock...........what if prem was .50 cents or 20 cents.........whatever........you get paid !.........

The closer to the expirations the better for you & working with the trend the better for you.,...........get it ? you could safely do size & take money from the markets.............YES there is RISK as in anything........you could BUY a stock at $47 & it gaps $20 agaiint you the next day.........this is the risk we take in trading ........but all things being equal........your leverage is greater in writing options & working with the trend........I make money with this method, just have to be patient & wait for your criters to setup.........The size you do is up to the trader....ALSO........put your price you want...if you see 30 bid 40........put in for .35........you many times will get your fill.......never use market orders ever........you will get raped....they will make the market 20-30 & you get .25 & on 10,000 shares its 1,000..........so remember that....


I hope I made sense to you & I hope you know its 4 :15 am & I am willing to let the past be the past & hope you could see I am not some vendor sitting on ET trying to suck all the people.......I trade & my main source of income comes from that that......I have a large acct & the chatroom is another source for me & its my vehicle to give back to others & help them make money, its a paid service, I am not a missionary, I believe if you give a good product at a fair price you should be compensated & I do & am happy with that business, I do NOT give option ideas in that business, this is something I do for my trading accts ..........BUT putting that asde I hope you see I am a solid person, I have no incentive to had put this information out there except that you & I could be on the same team ...the Elite team & help others to grow & be successful togther than to battle each other over 3 cents on one of my chart example calls........doesnt help me or you...........SO I hope you like this & hope you turn over a new leaf toward myself & others that are giving to you & the ones that could use the help........Happy Holidays...>Chartwiz
 
re: writing options:

some market markers actually make fair 2 sided markets. The guys making 1x100 markets are getting squeezed out by these firms. Given the competition between exchanges and market makers, spreads have tightened dramatically over the years.

all the time I hear from some novice that writing options on a weekend is the best strategy. This is not correct as a proper options model is going to take this into account. If a market maker is buying or selling an option at 4 PM on Friday before a 3 day weekend, don't you think they are going to take that into account?

Don't get me wrong, there is a great deal of money to be made writing options as options are a decaying asset. However, the real money - i.e. the home runs - are going to come from being long an out of the money put or call. It is matter of risk/reward.

I can't speak for everyone but I assume that most swing traders are looking for a decent move in a given stock. Even when taking the spread into account, the %return on capital can be much higher when utilizing options.

The best suggestion I have would be to note an ATM or 1 strike out of the money offer price on an option of the stock when you put on a trade. Then when taking off the trade, note the bid on the same strike. Do this a few dozen times. If you would receive a higher return with options, give them a shot if not, stick to stocks.
 
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