I have been doing well daytrading common stock. I am trading in an IRA, so it takes three day after closing a trade for my funds to be available for trading again. Since it is one day for options and since I get some leverage with options (even in an IRA), I would like to start day trading options. I am considering buying in the money calls to sort of mimic stock ownership, when I am bullish. However, I have heard that day trading options is extremely difficult. Can anyone tell me why? Thanks, Norm
Pretend that the Average true range of your stock is $1.Take an ITM option with a delta of 70-90 and the spread would probably be at the least 10 cents. No one will let u buy at fair value which means you'd probably be taking offers,hitting bids. so you are out 5-10 cents going in and 5-10 cents going out. You are out 15-20 cents just to play the game on a stock that has an ATR of $1. Great traders probably take 50% of ATR, so it could be a big headwind.
1) A wider bid/offer spread than the underlying- .05-.20 depending on the contract. 2) Limited liquidity meaning you are more likely to have to pay above spread to enter and exit.
Another issue to be concerned about in an IRA is auto-exercise. Look at http://elitetrader.com/vb/showthread.php?s=&threadid=51251 for one war story. If you're going to be daytrading long options purely on directional plays, you have to be selective. As other posters pointed out, the spread is a problem. I daytrade SPY options, but only when the volatility is there (and, lately, with earnings season and oil, it's been pretty good) and only when there are options that have a delta of .7 or better and cost less than $3, because the spread is generally 2 ticks and you hardly ever get filled inside the spread.
You all are looking at the half empty part of the glass. Using SPY as an example: It's trading in the $123 area and you can buy a -1 Delta Put for about $1.50/2.00, or less than 2% the stock price. A small move in the stock makes you a large ROI on the Put. Yestarday afternoon on one of my bad trades, bought a 125 Put @ 1.35, the Delta was close to -1. Thought SPY was ready to head down, it did a litttle then turned up. Covered at 1.45 ( only .10) but that's 7.4% ROI for about 15min., or only 148% per month...on a bad trade. This is the greatest home-based business...ever.
I try not to look at glasses half empty. Using a single anecdotal example does not refute the fact that the spread is significant as a % of the range you are trying to capture by daytrading stock using options. Try doing the same thing you did on the spy puts 100 times and the sprad will pmost likely catch up to you. NOt saying can't be done but defintely big handicap/
I agree. Wide bid-ask spread is a big handicap. Another variable that should not be forgotten is implied volatility. You can lose money with options with no movement in the stock.
True re IV. Also along those lines, as x approaches and going into long weekends, the rot of theta can become a factor even in intraday trades.
============= Norm; May be able to split bid/ask spread on the liquid stuff like QQQQ; but unlike stocks, when you get your option sell signal, maybe have to pay the full spread to close contracts. Could try it since you did it in underlying stock. Like options occasionaly, but quite frankly buyers dont have a half empty /half full glass; you may have a swing traders choice if you find out what can happen to option buyers in a extended sideways move. Also with a daytrade deadline on options; you may have to pay up in price & cancel orders fees, swingtrader would like to get filled on a pullback-daytraders may not have enough profit time for that, like a longer time frame does.