Is it possible to increase returns by just changing trading instrument from ETF to index options and keeping the same risk in $ ? Lets say I have a system that trades the QQQ and the RR-ratio is 1:3. Ex. each trade do risk $100 for a expected profit of $300. The profit target is fixed 3% and SL is 1% What is the instrument to chose? options on QQQ, options on NQ Futures or options on a leveraged 3xETF like TQQQ. What are good option strategies to use? Just long options or some kind of spread or someting else?
I expect the answer to your question is yes but at a cost. Equities are constantly trading on the bid and offer while the options you want to open and close on might not, so you will be dependent on a MM for much of your liquidity. I would avoid the 2x and 3x products and use the more liquid QQQ.
Did forgot to mention that the trading style is swing trading and position hold period is 1-6 days. The stop loss in $ for each trade is $7000 so these is a decent volume to work with.
Then options work well with symbols that have tight spreads. I actually like that to limit losses without stops.
I ran an experiment for a few months doing something similar. When my entry signal told me to open a position in an ETF stock I also bought one call option on the same ETF (if the open interest was high enough, not all ETFs passed this requirement). When my exit told me to get out, I also sold the call option. My hypothesis was the same as you: if the stock is promising, then I can improve my profit by buying the call option? In my case is the average holding period on the stock much longer: several weeks. This turned out to be not good for the option strategy: due to the time premium did the option lose more value. This time premium gets smaller when you get closer to the expiry date. So I did see that the option price went up shortly after buying it, but that the price had dropped by the time I closed the position. My conclusion was that I was not convinced that the hypothesis was correct, so I stopped doing this.
Peter Lynch in one up on wall street said the following- Getting the direction of a stock right, is itself difficult but in options you will have to get direction as well as timing right. Shorting options is always better but you have a blowup risk.
The two are not equivalent. With options, you will be competing against theta (time decay), and have to worry about everything from vol/skew and convexity. It can be modeled, but it's not as simple as using options as a proxy for delta.
@quant1 Correctly stated, you are not accounting for change in implied volatility (Vega) or Theta, Delta or Gamma (for your time period Rho shouldn't matter). With different expirations, strike prices and premiums, I do not think you can compare the two and get rational and consistent results.