Yes, but you pay the options premium for that advantage. If the market senses increased gap risk then IV will usually be bloated. That's why I said I don't think option straddles (or whatever directional mechanism one chooses) are better or worse than outright positions with stops, just a matter of personal preference.
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Trend Following with options?
- Thread starter luckyputanski
- Start date
Yep, this is indeed the case...Quote from Butterball:
A typical trendfollowing approach with stops and no profit target is basically a synthetic option. If you get stopped out for a loss that'd be the analogy for option premium paid that expires worthless.
Trend following ≈ long options
Mean reversion ≈ short options
Quote from Butterball:
Yes, but you pay the options premium for that advantage. If the market senses increased gap risk then IV will usually be bloated. That's why I said I don't think option straddles (or whatever directional mechanism one chooses) are better or worse than outright positions with stops, just a matter of personal preference.
I don't believe the market is usually good at predicting fat tails, they also is not good at predicting the extent of the price change during them. Sometimes they do and you overpay but lots of times you don't. Furthermore its possible to overpay for volatility and still make money. Jim Lietner explains that on Inside the House of Money. Since the option market makers delta hedge and the underlying shows trending behavior, you can overpay and still make money(though probably less than buying the underlying if the options were overpaid for but as I said I don't think the market is all the great at predicting those tails). The fact the they sometimes delta hedge is a strong argument against the idea that they are priced correctly and are anticipating the tails
All it takes is one of these black swans every few years(Maybe even less frequently than that) to make using options superior
I'm not expert in options but this is my understanding of the subject
I usually exit before stop loss, so it doesn't make much difference.Quote from FrankSlaughtery:
have you thought about buying otm options to protect against gaps?
With stop loss executed at open price:
MAR: 1.2
PF: 2.86
CAGR: 87%
With stop loss executed at stop price (inside the gap)
MAR: 1.36
PF: 3.10
CAGR: 96%
I have a feeling that buying otm options would cost me more than the extra profit.
I agree with you, however, I didn't mean strong trends or fat tails, just big gaps.Quote from Daal:
I don't believe the market is usually good at predicting fat tails
If you use the underlying and a stop you're exposed to gap risk. With an equivalent option you don't have the gap risk but you pay for the privilege (the premium). That's all I meant.
Both approaches achieve the same goal, IMO each are just suited for different types of trader personalities. A matter of personal preference as so often.