In general, I feel more comfortable calling price direction than volatility. Over the past year or so, I have been relatively successful trading long DITM calls or puts as a proxy for the underlying. I am trying to figure out if this is really the best approach towards grabbing a small move in my direction -- say for instance, half the 14-day ATR in the underlying. In the past, I've traded ATM calls with limited success, and to the best of my knowledge it seemed the reason I wasn't grabbing the move delta might have predicted was because volatility would drop as the trade moved in my direction. However, those were longer term swing trades, so I don't know if that experience would hold for smaller intraday moves. Other options would be spreads (debit or credit), roughly ATM to get R/R close to reasonable. Again, my limited experience has been that these don't tend to "come in" until close to expiry, but I can't really explain WHY that might be, especially since theta should be spread off. I do like the fact that vega and theta are reduced, but my helpful gamma is also lost, too. I'm seeking any advice, including links to studies or books that might specifically discuss the use of option strategies for short-term directional trades. Thoughts? Appreciate the help (in advance).
I gave up on verticals for precisely that reason. The credit leg, when ATM or closer to the ATM strike holds its time value longer than the debit ITM leg. I've had the joy of waiting 6 weeks for a vertical to yield value when the actual move was done in two. McMillan writes about this in his book and indeed advocates just buying the option if you have directional conviction. Theta is not linear BTW.
Yes, he covers that much better than Natenberg. I found my notes and all that (including tables I drew up) was written in the addenda, so it's from McMillan as I read Natenberg first.
The biggest issue trading ITM options is that you might be giving up $0.05 to $0.10 to enter and exit the trade. This reduces you expediency way to much. 1245
This is something I have always hesitated over, and I am still conflicted. On 14th August I bought AAPL 101.43 Oct 17 Calls when UL was at 100.58. Today they are ITM but I'm still showing a loss because of time decay. Might have been better off taking DITM here, especially given I was taking a 2 month view rather than trading the iPhone 6 release day.
AAPL is very liquid. I would avoid the DITM options like the 80 calls or even 90 calls. I would look at the ITM calls that are around 3% in the money. That should be better if you need to use calls vs stock or stock+puts. The OTM put markets will be tighter but you need a PM account for the hedge to over similar margin to just buying the call.
Would a short put work better than a long call as far as swing trading goes? I have my concerns with the risk profile, but if my intent is to get out within the trading day, I might be able to live with those.