Using options for swing trades

[brad1970]

I like using credit spreads 2 weeks prior to expiration. 3 to 5 underlying, 5 to 10 contracts a piece.

Only the most liquid, with low delta high theta, just let time eat away at the trade.

Wrap the strikes around the close prior to placing the trade or take the spread just OTM, and just ride them out for 2 weeks.

 

[illiquid]

Thanks for all the replies.

The main reason I wanted to go with options vs outright stock is that it's much easier to sit in the position since the risk is limited --I don't mind a large percentage drawdown on the premium I paid, and am willing to think of these as all or nothing bets (my attitude is that I'm taking my usual amount my stop-loss would risk on a stock trade and putting that in an option). Looking at it this way, would I be better off buying ATM or slightly out?

 

[brook89]

BRAD1970 can you please elaborate little more about your credit spreads trading methods.

What kinds of tools do you use?


Thank you for your response.

 

[kevink00]

fyi

I use a 50% stop loss point, as do most of the "options gurus." In my exp. if you have lost that much, you ARE wrong, she ain't coming back. It is VERY true that you must account for a lot of wiggle room. I like to trade the trusts now(QQQ,DIA) because of liqidity and unvolitile volitilties!

 

[Eldredge]

Originally posted by illiquid
Thanks for all the replies.

The main reason I wanted to go with options vs outright stock is that it's much easier to sit in the position since the risk is limited --I don't mind a large percentage drawdown on the premium I paid, and am willing to think of these as all or nothing bets (my attitude is that I'm taking my usual amount my stop-loss would risk on a stock trade and putting that in an option). Looking at it this way, would I be better off buying ATM or slightly out?

I had the same reasoning last year, and tried using options instead of the underlying stock (outright long positions). It didn't work well for me (not to say that it can't be done). My signals came when volatility was high so the options were expensive. Time value decayed every day. The delta would drop quickly if the position went against me. And, the spreads were a lot worse than for stocks - not to mention liquidity. In short, positions that would have been a scratch or small profit with stock were a loss, positions that would have been profitable with stocks were a scratch, and positions that would have been very profitable with stocks were profitable with options. All in all the lost profit didn't offset the occasional large loss that was avoided by using options. Of course, only a fraction of my capital was tied up, and my losses had a definite loss-limit, but it just didn't work well for me. I am sure there are strategies that lend themselves to using long options, but be careful while you are experimenting - my experience wasn't free . Good luck.

 

[AAAintheBeltway]

Originally posted by Eldredge


I had the same reasoning last year, and tried using options instead of the underlying stock (outright long positions). It didn't work well for me (not to say that it can't be done). My signals came when volatility was high so the options were expensive. Time value decayed every day. The delta would drop quickly if the position went against me. And, the spreads were a lot worse than for stocks - not to mention liquidity. In short, positions that would have been a scratch or small profit with stock were a loss, positions that would have been profitable with stocks were a scratch, and positions that would have been very profitable with stocks were profitable with options. All in all the lost profit didn't offset the occasional large loss that was avoided by using options. Of course, only a fraction of my capital was tied up, and my losses had a definite loss-limit, but it just didn't work well for me. I am sure there are strategies that lend themselves to using long options, but be careful while you are experimenting - my experience wasn't free . Good luck.

I agree with this. I think just going long premium and holding will destroy you unless you either get very lucky in picking underly8ngs or hit the right market. Over time you will be toast. My experience in options, particularly short-dated ones, is that it is almost always a good idea to take profits quickly. Conversely, letting the trade equity go to nothing will kill your account over time. You must have some sort of exit signal, either based on the underlying or the option price. If you are holding a front month more than a couple of days without a profit, you are taking a big risk. I agree with the previous post that credit spreads are a much better way to play swings, although I must say I have given back a lot by trying to expire them. Now I look to get in and get out, at least with the short leg.

 

[Maverick74]

Originally posted by Eldredge


I had the same reasoning last year, and tried using options instead of the underlying stock (outright long positions). It didn't work well for me (not to say that it can't be done). My signals came when volatility was high so the options were expensive. Time value decayed every day. The delta would drop quickly if the position went against me. And, the spreads were a lot worse than for stocks - not to mention liquidity. In short, positions that would have been a scratch or small profit with stock were a loss, positions that would have been profitable with stocks were a scratch, and positions that would have been very profitable with stocks were profitable with options. All in all the lost profit didn't offset the occasional large loss that was avoided by using options. Of course, only a fraction of my capital was tied up, and my losses had a definite loss-limit, but it just didn't work well for me. I am sure there are strategies that lend themselves to using long options, but be careful while you are experimenting - my experience wasn't free . Good luck.

You need to do bull put spreads. Problem solved. If you get your buy signals on long positions when vol is high then you put on the bull put spread and you will profit from the vol dropping, the positive theta, and the delta of the position. Remember vol tends to drop in rising stocks.

 

[Lobster]

Originally posted by Maverick74

Remember vol tends to drop in rising stocks.

Unless you are talking about an out-of-the-money call whose expiration is half a year away. It can easily happen that the stock opens at 20, the call is .20x.35 at the open, then the stock goes up to 21.5, the call goes to .75x.80, a few minutes later the stock stalls and the call is back at .45x.50

A couple of months ago, I was buying a DD Oct 50 Call for .45 or .50, selling for .75, .90, 1.10 over and over again. I am still holding the call. I think I should be getting rid of it now that DD is down so hard. But this last trade is really not that important. It cost me .50, whereas trading it has probably made me more than 2.00.

You can do this kind of stuff quite profitably if you select cheap options and wait on the bid on down days (up days in the case of puts), then quickly take profits on spikes and start over.

 

[Maverick74]

Originally posted by Lobster


Unless you are talking about an out-of-the-money call whose expiration is half a year away. It can easily happen that the stock opens at 20, the call is .20x.35 at the open, then the stock goes up to 21.5, the call goes to .75x.80, a few minutes later the stock stalls and the call is back at .45x.50

A couple of months ago, I was buying a DD Oct 50 Call for .45 or .50, selling for .75, .90, 1.10 over and over again. I am still holding the call. I think I should be getting rid of it now that DD is down so hard. But this last trade is really not that important. It cost me .50, whereas trading it has probably made me more than 2.00.

You can do this kind of stuff quite profitably if you select cheap options and wait on the bid on down days (up days in the case of puts), then quickly take profits on spikes and start over.

Lobster what I was referring to for him was the bull put spreads. Selling the ATM put and buying the OTM put. If he believes stock XYZ has bottomed after a sharp selloff and the vol has spiked because of that selloff, then if he puts on this spread he will be long delta, have positive theta and be short vega. So if the stock rallies he profits from the long delta, profits from the pos theta, and the more then likely drop in vega as the stock rises. Again this is a directional play. He can do this trade all year long and make great profits if he is good at picking his stocks and his bottoms.

 

[Lobster]

Originally posted by Maverick74


Lobster what I was referring to for him was the bull put spreads. Selling the ATM put and buying the OTM put. If he believes stock XYZ has bottomed after a sharp selloff and the vol has spiked because of that selloff, then if he puts on this spread he will be long delta, have positive theta and be short vega. So if the stock rallies he profits from the long delta, profits from the pos theta, and the more then likely drop in vega as the stock rises. Again this is a directional play. He can do this trade all year long and make great profits if he is good at picking his stocks and his bottoms.

I know. I actually do that, too. Just wanted to offer him another possibility to think about. Sometimes I even use both these strategies for the same underlying at the same time. I believe this is what they call a "stupid". But it has worked quite well for me.