index vs stock option trading

Discussion in 'Options' started by buybig, Oct 23, 2007.

  1. buybig

    buybig

    cool, thanks for the insight to your system.

    ive been playing w/ stocks for the last year but am getting serious about trading.

    i like the macro to micro theme

    the thing is is i dont have or subscribt to a trading system.. i dont have a peer base to draw from. thats why ive posted so many questions in a short time on this forum. this is the first REAL forum ive found.

    im working on a "system"..

    right now its super fundamental
     
    #11     Oct 23, 2007
  2. Aren't index options European-style - i.e. no early exercise?
     
    #12     Oct 23, 2007
  3. buybig

    buybig

    awesome.. a few golden nuggets of knowledge there..

    "Once all 4 indexes point on one direction, it is matter of time before the move towards that direction."

    awesome :)
     
    #13     Oct 23, 2007
  4. buybig

    buybig

    #14     Oct 23, 2007
  5. Since nobody has talked about the advantages in trading Stock Options, I just wanted to mention stock options are much more lucrative in terms of profit potential, which is why I mainly concentrate on them exclusively.

    Stocks can move much more on a relative percentage basis which makes them excellent vehicles for out-right option buying. Remember, if you buy options, a slow steady move is usually a killer due to time decay. While indexes can sometimes have large quick moves (like we experienced last Friday) more often they're not nearly as volatile as stocks. Volatility can be a double-edged sword. But if your analysis is correct and you time your trades to get in before an expected move takes place, the profits can be substantially greater than a comparable move of an index.

    A couple examples from some of my more profitable stock option trades should make this clear:

    Early May, 2007: KLAC set a new 52 week high and then pulled back to trade in a narrow trading range for the next 6 weeks. I was watching for a breakout above this level and in early July, 2007 KLAC closed at a new 52 week high. I bought August Call options the next day (I never buy the day of the breakout). a week later in the middle of the afternoon KLAC went up almost six dollars (over 10% move) on huge volume. I sold my Call options for an incredible 250% profit (I always try to sell when the crowd, indicated by huge volume, is buying pushing prices to overbought levels).

    More recently, October 16, 2007 I was watching YHOO sell off. The talking heads on CNBC said YAHOO was announcing earnings after the closing bell. Pete Najarin (from OptionMonster.com) said that the options market was indicating (by the price of a straddle) that a possible 10% move was in the offing. Just before the close I bought October Calls on YHOO. The next day the stock gaped open over $2.50 from the prior close and I immediately sold my Calls for a tidy 100% profit.

    Yes, I have my losers and yes, they can be substantial if the stock gaps against me. But moves like the ones I've outlined above rarely if ever happen trading Index Options.
     
    #15     Oct 23, 2007
  6. I do not think anyone disagrees that stock options are more lucrative thatn index.

    It is just that it takes more time to research and knowledge to invest on them.

    More power to you if you can make it in individual stock options ...
     
    #16     Oct 24, 2007
  7. If you are successful trading the underlying ETFs, go for it.

    Be aware that options have larger spreads, higher commissions and time decay, so you need to capture a relatively big index move (about 0.3%), in order to make money. Thus forget about daytrading options.

    Leverage also increases dramatically, for good or bad.
     
    #17     Oct 24, 2007
  8. Many index options (SPX, DJX) are European because they are cash settled and there is no underlying to exercise into. So to make it easier, they make them European so you cannot exercise and realize cash positive profits except on last trading day.
     
    #18     Oct 25, 2007
  9. I believe the key to all trading including option trading is watching what you are trading and that is price. And what i mean by that is defining support and resistance. Use indicators as confirmation as that is what they only good for. Remember analysis and trading or two different arts but make up a good trader. Just like a sports team needs both a good offensive and defense to ultimately be the best.
     
    #19     Oct 25, 2007
  10. There are good replies here. Thanks

    What about options on futures indexes? I find margin requirement for index options is very high compared to optioms on futures. Margin consideration could be important as well.
     
    #20     Oct 25, 2007