Example: $X. $9 bucks a share but also has somewhat liquid options. I want to go long this stock soon and wondering if I should buy spot or maybe the FEB 10/11 call vertical for .23c What do you look for in deciding whether to buy shares or the derivative? Does it have to do with spot price? Does it have to do with the liquidity of the option chain? Both? Thoughts?
In your example you'd buy a call as a more efficient use of capital (a long dated ATM option acts sort of like stock). If you were looking to acquire it, you may sell a put at your target price. Worse case, you get money for providing insurance. I am not aware of any dollar value method of purchasing options. They are simply a form of insurance. If you sell a put you're telling the market you're willing to acquire the underlying at your strike. If you buy a call you're telling the market you would acquire the underlying at the strike. The difference is with a short put you'll take on some premium while the stock is above your strike and with a long call you gain when the stock exceeds your strike. The inverse is true for long puts and short calls.
I have been taught - If you have a delta view buy the stock if you have a gamma/vega view buy the option. With that said when I go to Bloomberg seminars the "market specialists" often talk about buying options for a directional view. It's hard to think about buying options for a directional view but there are obvious reasons in doing so. As @ajacobson said, it's really your choice. If you buy the option you are not just taking a directional view.
The thing is, sometimes I'll buy calls or verticals in options that are relatively liquid, but as spot goes up, the options barely move. Now this is only sometimes, but on those times if I bought spot (which was relatively cheap >$15/share) I would've made out better. Spot has zero theta.
Easier said than done, theres no liquidity in the ITM calls, and the reason I verticalized the long call is because I'm looking for a short-term pop in $X so this makes sense, also the strikes I chose are most liquid in this stock $X
For me it's simple. If your objective is a short-term thing, then buy the option cause you're already setting a stoploss for the position. And of course the contrary if your goal is long-term
Like almost any question on ET your query is vague. There are always many factors to consider, i.e. - is tomorrow an earnings announcement.. Few traders spend much time deciding if they will do the option vs the stock. They usually have decided long ago to trade either equities or options and do one or the other consistently. That you are asking the question suggests you should stick with stocks. A good reason to do the stock is that it is only $9 a share. You can establish an interesting position of 100 shares for $900 Once you have traded stocks long enough to answer your own question you will be ready for whatever the market throws your way. Know that most "real" traders do not need the money. We trade for entertainment value.