best option strategy for my quant stock trading system?

Discussion in 'Options' started by artem65, Nov 28, 2012.

  1. (From my perspective) I would think your goal would be to cut down on that "losing 8%". I would look to improve the risk management. One idea is to use a debit spread. If you're right on your trade idea then you make money.... but

    WHAT IF YOU'RE WRONG...

    This gives you an opportunity to "adjust" your trade into a skip strike butterfly or a ratio butterfly. The end result is you "take in a credit" to pay for your loses on the original debit spread. (so in theory when you're wrong, your losses are 0% not 8%- but don't expect it to go perfect) Plus this trade takes time to learn....

    Of course, there are trade offs. Like all options trading strategies. However, it is my personal "trading philosophy" that controlling losses and risk are two main keys to trading success.

    This page will show you how in more detail:
    http://www.strategic-options-trading.com/debit-spread.html

    good luck my friend...
     
    #11     Nov 29, 2012
  2. artem65

    artem65

    i took a look today on the bid/ask differences of various sp500 stocks. most are ok but some have spreads of over 5%. it is not senseful to trade them if the option must move at least 5% (+ commission) to breakeven, right?

    will it be always like that or is a stock that moves down by more than 8% two days in a row (this is one of my buy rules) and is listed in the s&p 500, will not provide a tight spread?

    and, since i have no expierence with options; what is considered to be a tight spread in us stock options? when the bis ask difference is how much percent?

    please help!
     
    #12     Nov 29, 2012
  3. i usually only trade options if the spread is less than 10% but there is still a huge universe of stocks that meet this criteria. trading wide spreads isn't worth it IMHO b/c you give up too much getting in and out. i know, i know - just work the spread. well that doesn't work as often as you'd think and you end up paying near the offer and selling near the bid. say you make a 40% return on a trade but give up 10% on the transaction (ignoring commission)? you've just given up 25% of your profit.

    not sure what you mean by a stock moving down two days in a row?

    for your third question, see my previous answer. there are a lot of stocks w/ penny spreads. even ones w/ nickel spreads are really tight if the UL (stock) is priced above 100.
     
    #13     Nov 30, 2012
  4. sle

    sle

    (a) If you are trading untied in retail size, I hope you guys don't just trade the screen bids and offers. In general, you are better served by showing a limit order around mid and waiting for the stock to move enough to make some MM hit or lift you against delta. You will almost certainly do better (even on delta-adjusted basis) then if you just take whatever NBBO is there

    (b) A 5-10 percent move of option premium translates to a fairly small amount of movement in the stock itself. A simple calculation will prove it to you:
    -- imagine that you have a low volatility stock, e.g. something that moves about 1% a day - it's annualized volatility would be about 16%.
    -- assuming that implied trades at a 4% premium over realized, a 1 month ATM call will cost about 0.4*0.16*sqrt(1/12) = 2.3%
    -- the delta of an ATM option is about 0.5 (positive or negative) which that means that for a 1% move in underlying (a regular daily move), you option premium will change by 0.5%, which is about 22% of the option premium
     
    #14     Nov 30, 2012
  5. artem65

    artem65

    i cant follow some of your tips, especially when greeks are included. ;-)

    what do you guys think about trading Direct market access CFDs? they have leverage of 10 and follow the stock 1:1.

    i think they have also better spreads then some options, right?
     
    #15     Nov 30, 2012
  6. If you want tight option bid/ask spreads of .01-.02 (similar to the stocks spreads):
    1st: you are going to have to first find the stocks that have options with those tight spreads,
    2nd: then apply your stock trading methodology to that limited universe of stocks that have options with that tight spread.

    I know, its a bitch! Why do think I only trade the SPY etf?

    There are some popular large cap stocks and etf's with those tight spreads you desire, here's just a few examples:
    SPY etf
    DIA etf
    QQQ etf
    IWM etf
    DELL stock
    MSFT stock
    ORCL stock
    INTC stock

    I am looking at all of those stocks & etf's on my live trade station
    right now as I am writing this and January At the Money options.
    Bid to Ask is varying between .01 to .02 constantly, which means if its .02, then wait a few seconds or so and it will drop to .01.


    Jeff
     
    #16     Nov 30, 2012
  7. 11-28-12 04:31 PM
    To show how smoothly a quality large cap low volatility stock moves using 2nd month ITM options,
    on 11-28-12:
    the INTC stock was at 19.90
    the INTC Jan 17.5 calls were at 2.58

    In the past 2.5 weeks INTC stock dipped lower to 19.46 and
    The INTC Jan 17.5 calls dipped with to 2.18 (-12% drawdown).
    Then the stock has been as high as 20.99 (+5.4%) and
    the Jan 17.5 calls as high as 3.50 (+35%).
    Its currently at 20.51 (+3%) stock price and 2.98 (+15%).

    ITM second month, high quality large cap, low volatility
    stocks that have recently sold off at or near a 2 year support,
    are a relatively low risk strategy.

    Jeff

    Note: If you read back through most of my option trades, I am looking for a +30% profit most of the time. INTC would have easily hit that and I would have moved on to the next trade.
     
    #17     Dec 16, 2012