Trend Trading with Options

[vivaskyliska]

If your trading options as a directional instrument you wont be happy with the results. If you want to trade options I suggest you understand volatility and how options are priced. Usually before a breakout to new highs for example, a stocks implied vol will go up because people are betting on the same thing you are. Maybe if there is a breakout AND the option is cheap might it be a good buy.

Good point.
Based on your experience, implied vol is higher BEFORE a breakout to new high? or implied vol is higher AFTER a breakout to new high has taken place?
I reckon it's the AFTER that has a higher implied vol, isn't it?
That would make buying on a pullback more expensive.

 

[vivaskyliska]

No, not if you are using liquid options. But it might depend on the underlying. Grab some option chains and make a few assumptions, do the math. I personally think I am better off buying the shorter dated options.

Spreads.


deep itm options have a higher delta thus capturing more of the move dollar for dollar. Yes they are expensive so on a percentage basis your p/l will be less, but a dollar amount will be more. Plus you have a much higher chance of profiting using DITM options than OTM.

Just to add on, ETF normally has a lower volatility compared to a single stock's volatilty and this makes ETF options cheaper...
Correct me if I am wrong please