Trading options vs underlying

That is a reasonable strategy assuming you are really pretty decent at forecasting the bear move- BUT that IV spike you are hoping for will be dampened by the shift in the skew bec the OTM strike is now the ATM strike so keep that in mind.
 
baggerlord said:
Lets say I have a short bias on a stock over the next couple weeks. No price target, nothing more than a bearish directional bias. I'm thinking of the pros and cons of trading an initially delta neutral strategy of long slightly OTM puts with long stock. My reasoning is that if I am correct, I should see profit through an increase in IV, and if the price tends to be more directional vs rangebound I can make money via gamma as price moves towards my strike. If I rebalance daily (or intraday if I think I can read charts) via stock then essentially I limit my loss to theta minus gamma profits, with the potential for a windfall profit if IV spikes. I'm not too experienced with options, mostly have studied them vs traded them. Does this sound reasonable or worth the effort and transaction cost vs a straight short?
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To be delta neutral with slightly OTM puts, you will need around 40 shares for each put (assuming you long puts with ~40 deltas). The position will be theta negative, and I really don't see what is the point. Even if you re balance, you are till exposed to negative theta.

If you are slightly bearish, you can something like OTM bearish calendar. For example, with stock at 100, you can do 95 put calendar with longs expiring in 2-3 months and shorts expiring in 2-3 weeks. This is still vega positive, theta positive and delta negative position.
 
take the advise from Kim. Wth Vol so cheap, otm put calendars are prob the best way to harness a bearish foreast.. 2nd place is a put vertical with the long leg being the ATM put.(you get some skew benefit as well.
 
Using options, a synthetic long can be placed for free. This has identical bullish sentiment as buying and holding stock but without the initial investment. However, the margin capital is required. Sell otm put and but otm call. Adjust strike accordingly for equal premium. I like using ratio spread. Sell multiple otm put and buy otm call close to the money. This could pay for commissions. If the underlying stock price stays above the otm put strike, there is no risk of assignment and you're holding a synthetic long position. Works well on momentum stocks without dividend.
 
mushinseeker said:
take the advise from Kim. Wth Vol so cheap, otm put calendars are prob the best way to harness a bearish foreast.. 2nd place is a put vertical with the long leg being the ATM put.(you get some skew benefit as well.
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Why not both? If I have a bearish view and vol is cheap, I like using put diagonals with the nearer term put having a lower strike.
 
you could ...but with a diagonal consisting of a calendar w/ an embedded short put spread, you are effectively shorting a front month put spread which takes you back to bad R/R due to low vols..gray area trade because of this low vol regime ...also dependent on your magnitude of the move forecast, your strike placement , not to mention skew considerations.
 
But vol isn't as important wrt the short put spread if the strikes are equi-distant from the current underlying. Skew in a long put spread would typically be favourable for traditionally skewed equity underlyings.
 
yes you are correct if they are equidistant.... BUT with diagonal designed to harness a bearish prob distro, you would be selling an OTM p/s with a put calendar.. XYZ=100 being long a 95/90 diagonal means you are long 90 calendar with an embedded 95/90 short p/s on front month.Now , if you mean 2 distinct positions- a separate equidistant p/s combined with a put calendar, then yes that would accomplish what the OP needed.
 
Actually, one would be LONG the embedded front-month put spread within the diagonal. For example, I opened up a bearish diagonal in MCD (X=159) yesterday given my bearish view and low IV.

+October 160 put
-September 155 put

To convert a 160 calendar into the diagonal, one would have to buy the September 160/155 put spread. A low vol is preferred since this spread is leaning OTM.
 
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