I am planning on starting a venture daytrading warrants. I guess 2000 euro is enough starting capital? By this I mean taking into account the elasticity that certain options provide. I will be mainly investing daily in deep ITM warrants with very low time value. Or I might go for deep OTM warrants with low deltas and no intrinsic value. This way I can maintain high elasticity / leverage so that intraday price fluctuations will be higher (ie. more range to get in and out of trades). Thoughts?
Leverge works both ways! Generally, options/warrants are not the best daytrading vehicles as the liquidity is lower and thus bid-ask spreads are usually wider than in underlying stocks.
Yes. I guess a swing trading approach could be more feasible and profitable in the long run. My question is, is it realistic to expect an average 5% ROC per day with warrants? I am sure than many volatile underlying instruments could provide great trading ranges if one has an edge in the market. My thoughts were to study certain stocks and indices and take trades based on particular RSI, MAs, MACD readings which I consider to be high probability trades. Then, instead of actually investing in the stock or index, I would purchase either a call or put warrant (depending on the trend and what my edge would indicate) in order to obtain more leverage with less risk capital (ie. no more than 2k). I guess I will not know how viable and practical this system would be until I dont give it a shot. However, thoughts and critiques on my method and trading approach are highly appreciated.
That's it right there: Try it and see for yourself! 5% per day is a lot, doing that day in day out is impossible. Granted, it may be possible with a low capital base, but as your capital grows it'll be harder and harder to reach those 5% per day. 5% per day is 21,862,578% per year compounded, which means that starting with 2,000, you'll have 437,253,567 in year and you'll be the richest man in the world in less than 2 years. Does that sound realistic to you!?
No. I think I didn't make myself clear. Sorry for that. I will be only risking 2000. That is, profits shall be taken out at the end of the week and the only operating capital shall be 2000. So no, I was not thinking about compounding profits.
OK then. Still a tough goal to achieve, but as you said, you won't know for sure unless you try it. So find your edge, if you don't have it yet, and then go for it. There's nothing to comment on, really, as you haven't provided any in-depth info on your strategy, but I'm sure you don't wanna do that anyway. In any case, substituting the underlying with options/warrants is not that straightforward, there are several factors that need to be taken into account, like IV, time decay and etc. (obviously, depending on your approach some factors may be more or less important, but still this is no straight substitution!)
I guess that if operating on a intraday basis, time decay wouldn't be that much of a factor to consider? I guess my only concerns are drops in Vega, Delta and Gamma during these short holding periods (ie. between 15-20 min. to abt 1-2 hrs. max). What are the fundamental risk management principles to take into account when dealing with options/warrants? I guess they must be very similar to that of stocks (ie. risk-reward, position sizing,...)?
True, intraday, time decay is not an issue, it can be though if you hold for a few hours going into long weekend. And, yeah, the risk management principles are the same. Once again, the biggest obstacle is relatively low liquidity and wide bid/ask spreads. If you plan on trading indices then I'd suggest you check out their futures. Futures got leverage and liquidity is not a problem.
margin requirements in futures are what are setting me back from using them. I want to start with low risk cap, on cheap instruments such as options (so that whatever little profit isnt eatten up by commissions) and then build my knowledge on how the whole trading world works. I might look into futures later on, but at the moment I am only studying index-based warrants.
Cheap's not always the best and warrants/options are not the easiest instruments to trade. In fact, trading any instrument is hard, and unless you have a very good background in options it is extremely hard to make money with them. Anyway, as you said, you won't know unless you try so try and see for yourself what and how it works and why it works.