Using options for swing trades

I

illiquid

Anyone use long calls/puts for swing trading with a 1-week average holding time?

Here's an example: if last week you wanted to bet that IBM would retrace part of its surge up to 83 (targeting around 75-76), which strike Sept put would you buy, given that you only intend to hold the position for 5-7 trading days?
 
I've been doing that for a while, it is definitely more difficult than just trading the stock, but I have learned a lot about options. Basically, your win/loss ratio is not going to be as good as a newbie options trader vs. a newbie stock trader, so you had better keep your bets very small. Remember that 100% of what you buy is always at risk and stop loss orders don't work out that well with options since they fluctuate so much. Basically your stop loss is your position sizing. If you can only afford to lose $500 on a trade, then you can only buy $500 worth of contracts. There will be days when you wake up in the morning and your $500 position will be worth $50, and then you will be glad it was $500 and not $5000. The reverse is also true of course, but opportunity cost is not the same as a real loss of cash.
 
I am. But two things could really eat you up, based on my experience.

(1) slippage. For illiquid options, the slippage could be as high as 35 cents to 50 or 60 cents.

(2) low delta. That is to say, if the underlying makes a move but the option you have hardly does so. Time decay could really eat up your option premium

And I agree with metooxx. Trade front month, ITM options, but not too deep in the money, since slippage is usually wider for deep ITMs. Besides, if the stock unexpectedly gaps against you, you lose less if you hold a slightly ITM option than you do a deep ITM.

If the option is too illiquid and the slippage is too wide, you might want to just trade the underlying, especially when you do a long trade. On the other hand, I no longer short stocks: I just buy puts when trading the short side.

Hope this helps,

stock.
 
Just want to add. In my opinion, the best issue for which you want to experiment more complex options strategies is the QQQs. In fact, it might be simply be the best place to trade options: small slippage; extremely liquid; strike prices often only in $1 increments.
 
I would stay with high delta and very liquid options.

Watch for high spreads they will kill you.

DELL MSFT CSCO and especially QQQ are very liquid and narrow spread options.

I LIKE qqq s because once they are in the money they can trade dollar for dollar.
 
I would suggest QLGC also. It has good options liquidity most days, usually at least 100 contracts on the bid and ask on the close to the money contracts. It also has good volatility. My personal experience is completely with the puts lately since I think it is setting up for a big drop in the next couple of months.
 
I do this type of trading alot. I prefer to go out an extra month ar so because if the stock trades sideways for a longer period than you hoped you wont get much time decay. I pay more attention to the strike price and entry. If I am pretty confident of my direction I like to go AT or IN the money a bit to get good delta. Best to take your position while the stock is going opposite your direction a little and sell while its heading your way (better volatility pricing) One bad thing about options is if you buy during high volatility and sell during low, you can take a loss even if the stock goes up in value. Nothing worse than when you see a move starting in the stock and want to take the trade using options just to see the option price jump up ahead of the move anticipating the higher price. When this happens I either wait for the option price to come back to earth or I go long or short the stock. Cant stand paying more than I should for anything. Happy trading :)
 
"Best to take your position while the stock is going opposite your direction a little and sell while its heading your way (better volatility pricing) One bad thing about options is if you buy during high volatility and sell during low, you can take a loss even if the stock goes up in value"

boy you said it. That too me is what makes option trading more difficult than stock trading in a nutshell. Several times I have been completely right on the stock and totally wrong on the option.
 
quid,

I use options for swings about 50% of the time and underlying securities for the balance.

Deciding which strike and expiration to utilize is best based on a number of factors specific to your trading style and often specific to a particular trade: type of entry, expected magnitude of move, expected timing of move, probability of success, the price of the underlying price at which you will stop out the trade, money management parameters, confidence in trade, etc.

My recommendation is to find an options calculator and work through scenarios that match your typical winning and losing trades with different strikes, expirations, and volatilities. Doing so will help you optimize your trade execution with the other critical factors.


O.
 
You must log in or register to reply here.
Back
Top