Buying Put Options instead of Shorting

Discussion in 'Options' started by Sam Mcgee, Feb 8, 2018.

  1. ironchef

    ironchef

    If you trade options using market, you will buy at ask and sell at bid. But on ET we don't trade on market orders, we always use limit orders. Usually but not always, you can buy/sell at roughly mid between bid/ask so the slippages are not as bad as you said.

    You won't get mid if you are DOTM or DITM. With DITM you usually get less than intrinsic if you sell to close and for DOTM often the bid/ask are so wide you are better off not trade those.

    Good luck.
     
    #11     Feb 8, 2018
  2. The b/a on many options is a big problem. You might get a fill in the middle both ways, but don't bet on it. And don't bet on getting a fair price when the thing moves your way. They love to keep the bids at GYP levels, to victimize YOU.
     
    #12     Feb 8, 2018
  3. That's the excuse, but it makes no sense. There is a fair value. They could make a market x cents either side of that, No real reason to make the spread 20 to 50 VOL wide.
     
    #13     Feb 8, 2018
  4. neke

    neke

    You realise that option price is a guess-timate - so thinking mid is fair value would be detrimental to the market maker. If someone with better knowledge hits the ask (with spread of 1cent) with volume, forget about the prior 'fair value', it is no more the fair value. It is that uncertainty that compels them to demand a bigger cut.
     
    #14     Feb 9, 2018
  5. I gave it some more thought today and I think my method of trading would actually work by buying put options instead of shorting. Typically when I trade long, I might be averaging a profit/loss of about 1%. I can count on about 0.2% for my slippage, commission etc. So my average profit should be around 0.8%. When I look at the bid ask spread for put options, the lowest I see is around 1 to 2% so instead of 0.2% slippage, I'm probably going to end up with about 3% slippage. However, because of the leverage, my average profit should be around 10%, instead of just 1%. That would leave me with a net average profit of 7%.

    I experimented today with the trading simulator on Interactive Brokers. I shorted about $65,000 of NFLX which was 225 shares. I also bought 80 put options for around $65000. My expense to short the 1000 shares, might be around $100 for slippage and commission. My expense to buy the 80 puts might be a lot more at around $1200. However you can see that the profit for my puts makes the expense worth it. Capture.PNG
     
    #15     Feb 21, 2018