It all depends on the situation. If you are going to trade pure directional up/down like a stock then you might be better off in the long run only going with long calls or long puts. This is the same as traded the stocks but using the options instead for leverage. You can ust do a cursory study of the greeks to understand IV and delta to help you understand the risk parameters. Since stocks do not always make large moves after you go long the call it is important to understand why the stock can move $2.00 after you buy the call and the call moves like $0.50. Ignoring that then you should simply learn about IV and relative price. Even if you expect a stock to jump higher, buying a long call with IV at high levels is putting some headwinds in your way, such as IV changes and a larger move needed for the position to become profitable. Does not mean you need to move to spreads per se, but understanding the IV and comparing it to historical levels may help you pick better entries or stocks to get directional on.
the vega crush impact on all expiries is equal (on a $ amount), otherwise an arbitrageur could automatically pocket such difference. this fallacy arises from the fact that a front month could lose as much as 100% of its value when iv crush happens, while the back month might only lose say 50%, but the dollar amount loss in each is exactly the same. there's no benefit in buying back month premium to reduce the vega risk, as the $ risk is absolutely the same in all expiries with the additional problem of increased slippage in back months.
The probability is not quite right. Since you close the ATM option when the price is 1.25, you should use the touching probability. Whenever you change your exit method, the probability changes. Thats why risk management (exit strategy) is the key for option trading.
I dont think anyone advocated buying back month prmeium to reduce vega risk. we were referring to vertical spreads to reduce vega risk and separately calendar spreads to take advantage of IV skews. two separate discussions
Well, no. If so, the calendar would be flat vega sensitivity. There is no arbitrage on duration beyond the roll market.
Thank you for the suggestion. I already do this. In fact I use delta on every single trade for position sizing. I have created a spreadsheet where I enter the price of the stock, my stop, the amount I want to risk, my price target, the delta of the option I want to buy, and the spreadsheet tells me how many contracts I should buy , what my risk reward and R value are etc... I said I am not an expert in greeks, but I still understand why a call moves only $0.50 on a $1 move in the stock Thank god... In fact this is reason why I mostly trade DITM calls/leaps with a delta usually above 0.8, and which are not too affected by time decay. Because I found that it was the best method to trade for trend-following. Except maybe for some calendars...and this is why I asked the question in the first place. To see if I could improve it.
Yes there is no need to master the math behind the greeks, just understand what delta, theta and vega are in general. For your approach, the only one that is truly relevant is vega but not as much if you are buying DITM calls with deltas of .80.
What is the touching probability? The probability that I used is the probability of the option being in the money at expiration (and expiration only.) Until expiry, the option could go in and out of the money many times.
The touching probability is the prob that the spot touches the target at any time including expiration. It is higher than the prob of expiring. [edit] Since you want to exit your position when the spot touches a certain value, you should use the touching probability.