I buy 20-100 Contracts at a time, wait for a 3-200cent drop (usually closer to 3-7 cent) and to do this, I buy DITM (options on call or put side) with very high deltas to get that quick price reaction. My question is, there are options that are not as DITM and are obviously cheaper but have lower deltas BUT have higher Gammas, is the reduction in price for a lower delta like call for instance (.82 for the cheaper option) versus a delta of (.91 for the option 1 more unit ITM and more expensive option) worth the decrease in delta? It seems that the reduction in cost (like 25%) plus a 18% increase in gamma is worth the cheaper option, any thoughts? Thanks
How can you view this without taking the bid-ask spread into account? The deeper you go, the worse the execution.
Please go into details as I always thought the bid ask spread was just there. That may sound nieve but I am being honest so ANY help would be appreciated. I almost always trade contracts that have enough liquidity to move penny by penny or 1.21-1.23 or at the most 1.21-1.24 (rarely) Thank you
Sounds like you are okay, then. No easy answer to your question--may be a matter of personal preference--and it depends how long you are holding them. Over short period, with remote expiration, do not need to worry about theta that much. Otherwise, deeper ITM option may be preferable.
Do you have historical price data that you can assess to possibly answer your question? I can chart price of a given strike/expiry over time. Do that for a few different strikes and see which one has the highest % gain when the underlying moves your way. (Do the opposite, too. Look at the risk when your directional bet is wrong.)
If you look at the problem purely from mathematics, i.e., percentage profit vs percentage change in underlying, the lower price options will always give you a higher percentage gain. However, again it is pure mathematics and probability, if you hold the options to expiration, the DITM options as opposed to ITM options should have a higher probability of being profitable and so you have to pay more. Your counter party is not dumb and probably won't willingly hand you his money. Don't know if I am making sense, if not someone please correct me.
Yes, ironchef, and also the OP's holding period. Hard to tell what it is, DAYMSTR. Are you day trading these things?