What's Your Favorite Underlying Stocks To Trade Options On?
- Thread starter birdman
- Start date
Trading a select group of options is something that I am constantly thinking about. Currently, I do not have a select group of options. Instead, I download information each morning into an access database that I wrote so I can seek out very specific details on options.
One thing I look at almost all the time is the percentile of implied volatility AND the gaps between the historic and the implied, both in composite and skews. This is what I use to determine what are "cheap" and "expensive" options. When I find an option with implied volatility below the 5th percentile AND with historic vol trending up and currently above implied volatility, I feel safe that I'm looking at a genuinely cheap option.
This is basically a modification to Larry McMillian's approuch. He tells traders to trade ALL markets (futures, equities, indexes, etc.) And look for extremes in volatility. The story goes that for the most part, implied volatility maintains a range and it's MUCH easier to identify a true high and low. In theory, it sounds great.
Now here's the problem with this approuch. Though I'm only looking at trades with high probabilities of success, they are typically not liquid. The Bid/Ask spreads on these trades are usually rediculously wide, so what ever benefit you get from the finding an option at an extreme is usually lost to the added risk of dealing with a wide bid/ask spread. So, you wind up waiting for an extreme to occur in something that has enough liquidity to trade. In the end, you come up with very, very few trades - too few in my opinion. The only exception to this is perhaps long straddles.
Mr. McMillian does not discuss this MAJOR drawback in any of his books and it's my biggest problem with his method. I can go for days without finding a single trade and I'm using a computer to find them. More and more I find myself considering the benefits of building a "core" group.
Has anyone else been down this road?
One thing I look at almost all the time is the percentile of implied volatility AND the gaps between the historic and the implied, both in composite and skews. This is what I use to determine what are "cheap" and "expensive" options. When I find an option with implied volatility below the 5th percentile AND with historic vol trending up and currently above implied volatility, I feel safe that I'm looking at a genuinely cheap option.
This is basically a modification to Larry McMillian's approuch. He tells traders to trade ALL markets (futures, equities, indexes, etc.) And look for extremes in volatility. The story goes that for the most part, implied volatility maintains a range and it's MUCH easier to identify a true high and low. In theory, it sounds great.
Now here's the problem with this approuch. Though I'm only looking at trades with high probabilities of success, they are typically not liquid. The Bid/Ask spreads on these trades are usually rediculously wide, so what ever benefit you get from the finding an option at an extreme is usually lost to the added risk of dealing with a wide bid/ask spread. So, you wind up waiting for an extreme to occur in something that has enough liquidity to trade. In the end, you come up with very, very few trades - too few in my opinion. The only exception to this is perhaps long straddles.
Mr. McMillian does not discuss this MAJOR drawback in any of his books and it's my biggest problem with his method. I can go for days without finding a single trade and I'm using a computer to find them. More and more I find myself considering the benefits of building a "core" group.
Has anyone else been down this road?
Quote from birdman:
Also anyone trading one thing exclusively ...
Maybe just QQQ alone?
Many Thanks
I am trading mainly QQQ and MSFT options now(over 56% of my trading gains since Jan 1, 2003 are related to QQQ puts and calls). However, the MSFT market makers really get on my nerve in the last few days. I am slowly closing the MSFT option positions. I plan to trading QQQ options exclusively in three months. I'll let you know the results in six months, if I can survive until end of the year.
this strategey sure does eat up your trading power in margin requirements, and the write position, being unhedged sure isn't worth it, what with the premium for the 65 call not really being that much, especially in comparison to the long 60 call, and the same for the 55 put over the 60 put long.
there are some strategies that are brilliant, but are hard to defend in comparison to just taking the time to be there or check the markets every hour or so, and just go long or short with the options and let the expected outcome either occur or fail.
but then again, like Yogi said: "they give you cash, which is just as good as money"....
Quote from omcate:
I am trading mainly QQQ and MSFT options now(over 56% of my trading gains since Jan 1, 2003 are related to QQQ puts and calls). However, the MSFT market makers really get on my nerve in the last few days. I am slowly closing the MSFT option positions. I plan to trading QQQ options exclusively in three months. I'll let you know the results in six months, if I can survive until end of the year.
paint dries faster than MSFT options producing profits....
Usually, this is not a problem. I am very patient.
Yesterday, two of my MSFT option trades were busted. Today, it took more than 30 minutes to cancel an order, over 45 minutes to buy another MSFT options, etc. The market maker only executed the order ten minutes after I sent in an cancel request. Of course, it was filled at the high of the day. And the list goes on and on .....
Quote from omcate:
Usually, this is not a problem. I am very patient.
Yesterday, two of my MSFT option trades were busted. Today, it took more than 30 minutes to cancel an order, over 45 minutes to buy another MSFT options, etc. The market maker only executed the order ten minutes after I sent in an cancel request. Of course, it was filled at the high of the day. And the list goes on and on .....
Why don't you execute through ISE and avoid that nonsense?
