How useful would this be in risk managment if you held a call or put on a position you intraday on? Obvioulsy, it would depend on your on style and system, but in your opinion would it be helpful to do? I think you could pull some interesting strategies/techniques regarding stop-loss and amount of capital risked with an option backing your position. Thoughts? RT
Interesting idea, but are the options liquid enough? Also, option pricing formula can get very very complicated, so to find the optimal hedge using the options might not be trivial.
If I understand you correctly, you are going to liquidate your option position every day. If that is the case, in long run your strategy will be a loser (whether you go long or short the option) for various reasons such as slippage on the trades . You might as well be in the futures markets alone (putting less positions on) - good luck to whatever you do
not liquidating everyday....just holding for two reasons (1) to allow intraday play on the most volatile stocks while limiting loss from black swans, etc. and (2) when the strike price may fall in line with market price, I may be able to make swing plays with lowered risk. I have not spent too much time creating details for all of this... that's why I am asking if anyone thinks it may be helpful.
I was trading at a firm that set us up with the option package tied to its software. The software would flash how many shares your options were in or out of the money and tie this to the number of shares you were holding with the options.... Accordingly you could exercise your options as you gained ground.....Sounds good on paper The effect was watching options moving almost more than my actual trading and the amount of capital required would end up freezing out my account....The number of shares i was limited to therefore limited my gains as the options became valuable.... The amount of time spent making profits on a few hundred shares was not worth the opportunity cost of the effort. I watched large moves happen with very little gain when If I was riding trades I would have taken more profits...(intraday holds) The other problem was the few days before the volatility of the stock made the options valuable....Sure I was hedged on moves but maintaining risk control proved to be more effective. Essentially the large capital requirements required made this trading interesting but not profitable for intraday trading. This form of trading may be useful on the longer term or if the market cratered against you in a massive tidal wave of action you could then exercise to limit losses.... The one problem with intraday trading is the massive hit a stock can take leaving you with no exit....Every time I enter a trade this thought is somewhere in my head. Too much hassle trading options for intraday profits.....
How do you guard against gaps? Also called 'jumps' in the literature.. perhaps immediately entering a limit to sell at some price that the stock should never hit accourding to current volatility..but in the case that it does, it would probably be more likely to execute than a stop loss.
Yep...not possible to guard against gaps that hammer through my stops..... When i set stops i generally put my stop price at a level then my limit price is effectively a good chunk INTO the money... If im long.......my stop may be 10 cents below the current price.....if the stock gaps down 40 cents.....my limit price is set usually 50-1.00 below my stop so it will be triggered....My triggered limit becomes an aggressive sell hitting well into the bid.... Again, the problem here is that your offer well into the money can make for some strange fills.....(you could really make someone elses day) I would still rather take that than not be out of the position
That's really interesting.. gaps that is. Have you studied the formation of them? I know most people say they are "instantaneous", but I have a feeling that what they mean is "really god damn fast". I wonder if its possible to develop some sort of gap prediction by analyzing depth of book, order cancellations, etc.. it would have to work very quickly.. probably less than a second or two.
Gaps...being seen in the future....With a crystal ball and some medication I can see anything No way to tell they are coming....... Sure on market open you can play with it but during the trading day. No way.... When I do see a gap its all about the play after.....I use them as strong support and resistance levels....Most gaps during the day will fill but that is just because most traders think they will and also why I'm writing this post so more traders will think they will fill...laughs..... Try this..... http://www.incrediblecharts.com/technical/gaps.htm Gaps take balls to be played.....the odds are with you however so your balls dont have to be that big.....