Hi Mark, thanks for your very informative explanation and yes you are convincing. It's unusual to see someone with a genuine concern for others and I appreciate that. For the person who suggested QQQQ, I have found an edge with a few stocks. But as I explained, I cannot trade any size with them. I'm looking for moves of 2-3% on average, so now I understand that options aren't going to do anything for me there. I was naively thinking that if the stock goes up 2-3% that the option could go up 2-3% and that going the option route would let me trade a much larger size. So I bought "Options Made Easy" and well it's not easy at all. I'm half way through the book and as confused as ever. Back to the person who suggested NQ (nasdaq futures) instead of QQQQ, I'm currently trading the e-minis but my strategy is totally different there as the edge for the small stocks doesn't work with the futures. No surprise there, there are millions of people all over the world looking for edges whereas small stocks often receive little or no attention. I'm still interested in learning to use options as a hedge for long term trades however, so I'll keep reading the book. For example, I made a big mistake and bought GDX a few months ago. Actually the mistake was not to have used my stoploss. I think that if I had bought some OTM puts on it back then then I could have reduced risk and probably even made money on it. This is a totally different topic as we're not talking about daytrading here. But does this make sense? Or is it better to just use a stop loss and exit the stock? It seems that by buying puts one limits the downside but the insurance has a cost which can impact the upside. When the upside target is 2x then the cost of the insurance seems minimal. Thanks again to all for the input and suggestions. The suggestion for nasdaq futures is a very good one, just not what I need for the stock edge. So for that I'll just trade what I think I can get away with.
If the stocks have low volume, it's likely that their options will be illiquid and will have wider B/A spreads. And because you're fighting IV, time decay and a lower delta, it's much much harder to scalp with options. I day trade illiquid stocks(no options) because they're like the Pony Express... the next horse (bid or ask) can be miles away. Because of this, they tend to pop up/down in fits and spurts and can be scalped. My approach has been to take whatever volume is available and try to find as many stocks as possible that meet my criteria. If you have an edge, take advantage of it. If there's limited volume, there's not much more you can do. Stick with what works for you.
Just look at Friday's movement on the 32 Call option. (.QAVKF) This is perfect for daytrading. 2 major swings in the morning, a 25 point move , then a 44 point move. Lot of movement, low spread, TONS of volume. I have been making approx $300 - $400 per day, daytrading QQQQ. All you want is predictable movement ranges, low spreads, and high volume.
Penny spreads...a must for daytrading. Here is a complete list of the stocks participating in the pilot: http://personal.fidelity.com/research/options/optionpplaunch.shtml
That's for one cent increments not penny spreads, big difference. As far as I know only ATM QQQQ options have penny spreads, I'm sure there might be a couple more though.
I guess my take on this would be, you will NOT have a margin call if you trade options vs Futures. I have trade futures on commodities in the past and the dreaded margin call was always an account killer. The options has the additional leverage over trading the stock. I do not plan to hold the options for long, just long enough to get a nice move, then get out. Take what the market gives you with the least amount of exposure.