Futures or Options - which is better as a swing trader? Hi. I need advice on option traders. I would like to involve in some swing or short-term position trading (eg a few days to several weeks). Which instrument, future or option, is better for a swing trader? My criteria are based on risks, rewards & capital utilization. I trade Hong Kong Hang Seng Index (Index Future). The market opens only in the morning (session 1) and early afternoon (session 2). There's always an opening gap each day. Future: - tight spread(eg 1-2pips) - require margin - unlimited risks but you can always control your risks by stop orders - more rewards since every pip you gain will get into your pocket Options: - wider spread(eg can be about 10 pips wide ocassionally) - require margin only if you sell call/put - max. risk is fixed for call/put buyer - you need to pay premium, so you can only gain after your gain can offset your premium Any advice? Note: Even if you know nothing about Hong Kong Hang Seng Index, you can still give advice based on your general knowledge about futures and options. Thank you!
The stop loss doesn't protect against price gaps. To get the added protection (limited risk) the options offer, you pay a premium. If you hold your position only a few days, not in the last week before expiration, your premium time decay is relatively small. Usually the slippage makes very short term options trading prohibitive, even in the very liquid markets. In the case of options trading you are exposed not only to the underlying's price fluctuations, but to the options' implied volatility fluctuations too. I trade options only.
Futures or Options - which is better? This is a very inexpert question. If your trading aim is to continuously scoop a lot of money out of a market and build cash, straight forward buying/selling & selling/buying is what is you need to do .. accurately and knowledgeably done, of course. Incidentally I have nothing against the markets in options because they represent an important service.
To decide whether an option or future is favourabe, I think I need to consider: - how large the gap is next day. Normally it can be about 1XX-3XX pip large. - how much the premium is - how large the spread is for both future & option Any more ideas? Time factor favours seller, not buyer, right?
It's what I originally thought. But I once heard that, say, if the future price moves against you by 1 pip, you may lose half a pip on option. However if the future price moves in your favour by 1 pip, you can 1 pip gain. It seems it's to do with whether option is in- or out-the-money. It sounds good, right? Another benefit is option buyer don't need to pay margin. That means it can save more money for other uses. It may not be as easy as you might think. Any input is appreciated.
You have to consider outlier gaps, the so called "black swans" (low probability, large moves). They happen especially overnight. I know that many say this, but think about it: if it were true more people will want to sell and the option price will go down until the premium will reflect the real risk. It is a market. All options positions have zero expectancy (over a large number of trades the "%win * averageWin" equals "%loss * averageLoss". Due to slippage and commissions any options position has negative expectancy, without you forecasting the underlying's price and / or options' implied volatility over the life of your position. Short answer: I disagree with the opinion that the time decay favors the options seller. The option price correlation with the underlying price is approximated with one of several model equations. They yield several parameters called greeks: delta, gamma, theta, vega, rho. These greeks are non-linear functions of several factors among which are the underlying's price and option's implied volatility. Delta, or how the option's price changes with the underlying price, is larger when the option's strike is in the money, approaching 1, and it smaller for the out of the money strikes, approaching 0. Delta varies nonlinearly with several factors like underlying's price, option's implied volatility, time. When you buy an option you can't lose more than what you payed for it, so there's no margin requirement.
Sorry, what is outlier gap / back swans? Is there any difference from the overnight gap I mention above? Hmm... the reasoning sounds right, but it's not really. Think about it: But if I follow your reasoning, then no call/option is cheap or expensive. If it were true that the call was too cheap, buyers would bid the price up until it becomes not cheap anymore. Further on, we can conclude that market will never be profitable. People figured out the stock is worth $10. If it were true, all buyers would bid the price up until no profit can be obtained (ie at $10). Sellers will never sell until buyers bid up to $10. You buy an option or stock because you fell it will be rising. But there's another party which must think the opposite, or the transaction cannot be made. As you may see, the fault of this reasoning is to assume truth of something must generate action. Yes, buying-and-holding index stock is a better investment as history shows the returns on stocks are better than bank deposits. What's more, it's just very safe and effortless indeed. But over centuries, there're still more people who like to deposit their money into banks instead. Any comment/discussion is appreciated. Slippage should not be a cause of negative expectancy. Slippage just favours one side but disfavour another. If the price suddenly spike up, the buyer suffer from big slippage. The seller gains from big slippage. But does the non-linear relationship favour the buyer? Actually what do delta, gamma etc. represent? Do they represent the present only (eg so delta 1 only means the correlation is only 1 at present only.), or even the future (eg delta 1 can also be read that expected correlation is going to be 1 in the near future too. Surely things may change, but it's what we [the indicator] expect)?
Here's my another concern. ======================== Future: If I buy future, every point I gain will go into my pocket (after transaction costs). The same applies if it goes against me. Option: A change of 1 pip in future does not guarantee a change of 1 pip in option. I expect it should never has a change which can be more than 1 in any case. So it must be equal or less than 1 pip change. What's more, I need to pay for the premium for the option, especially if it is in-the-money. Eg: Future price is 10000. For Put 10200, strike price is 400. So actually the future has to drop by 200 to (9800 - "transaction costs in term of pip") before I can gain. Limited Risk, but harder to gain. ======================== I focus on better risk/reward ratio, and rate of capital returns (ie % of "Money Gained/Total Capital") Any opinion or comment?
Here's my another concern. ======================== Future: If I buy future, every point I gain will go into my pocket (after transaction costs). The same applies if it goes against me. Option: A change of 1 pip in future does not guarantee a change of 1 pip in option. I expect it should never has a change which can be more than 1 in any case. So it must be equal or less than 1 pip change. What's more, I need to pay for the premium for the option, especially if it is in-the-money. Eg: Future price is 10000. For Put 10200, strike price is 400. So actually the future has to drop by 200 to (9800 - "transaction costs in term of pip") before I can gain. Limited Risk, but harder to gain. ======================== I focus on better risk/reward ratio, and rate of capital returns (ie % of "Money Gained/Total Capital") Any opinion or comment?