I think you missed my point Mizhael. Which was that there is no such thing as an objective risk/reward comparison of day trading vs swing trading vs long-term position trading. This is a SUBJECTIVE comparison and you are the subject. You have to learn what you feel comfortable with. Your comfort level and confidence in your approach is what will determine your success or failure. Jimmy Rogers for example has been incredibly successful with a very long-term time horizon. His strength is seeing the big picture, and he doesn't care much about the timing. He thinks in time horizons of 10, 20, or 30 years so he doesn't care if his investments go against him for a year or two or three. But if you try to do what he does without that patience or confidence, you will without a doubt panic out at exactly the wrong time. So the point is not an "objective" comparison of styles. That will get you nowhere. This month marks 25 years since I first stepped into the T-bond options pit at the CBOT, so I've been doing this for a while. Please believe me when I tell you that you are barking up the wrong tree when you try to design a trading style for yourself based on "objective" risk/reward considerations. Your time and effort will be much better spent examining yourself and learning where you feel comfortable, where you feel confident, what kind of analysis really turns you on.
No benefit of daytrading options at all, even on the very liquid ones? Yeah of course I am with a small amount of fund...
Thanks a lot Mark! I am just exploring various instruments/style and try to develop a few complimentary style/tools that can be put into my weapon stock. Slow ones, fast ones. I want to be able to use them flexibly and smoothly in the future. So I enjoy embracing risky things at this moment, however with risk control and stop-loss of course, and equipped with your and other experts' excellent advice on this site. That's why I want to know the physical extremal limits of different styles/techniques... Thank you for your excellent pointers!
Wow! Power to you and your experience! //Admire! Thanks so much for your pointers! As I just replied to Mark, I am just exploring various instruments/style and try to develop a few complimentary style/tools that can be put into my weapon stock. Slow ones, fast ones. I want to be able to use them flexibly and smoothly in the future. I am at the stage of exploring a few approaches that fit me and my capabilities. Thanks a lot for your excellent advice!
Spreads and commissions will get you part of the time, time decay and volatility contraction will get you the other part, and risk management will get you the rest of the time. In my experience, it's possible to do it profitably in the short term if you have a good technical setup. Problem is, in the long run those spreads and slippage are always eating away at the account. Find a broker with cheap commissions, then be very patient with your executions. If an option is quoted 1.00-1.25, don't EVER pay the offer! Buy options like you would buy something at a flea market, haggle haggle haggle with the seller. Bid 1.05, maybe 1.10. More often than not the market will come in and you'll get hit. Market makers know that the retail crowd chases up stocks with calls and down stocks with puts, and those options get marked up and down accordingly. Don't chase options up or down if you're a buyer, you'll end up getting hosed.
Good point! What type of risk management shall we do for day trading options? And what is a good technical setup? Any recommendations?
Mizhael, I occasionally day trade very liquid options on high priced stocks approaching major support or resistance levels. It's an especially strong strategy when the S/R level is approached rapidly based on news. The advantage is you can leverage far more shares than if you traded the stock. One example from my trading journal was back on 7/31/08 when MA reported earnings pre-market, which were not bad, but they had a large writedown due to a lawsuit, and the stock started selling off hard, continuing to do so on open. I knew that the next major support level was $235, which was also at the 200-day moving average. If it approached that price, there was a 99% chance it would bounce hard. Setups like this are a gift from the market, take advantage! Sure enough it bounced off $237 and the moment it retraced to $238, I put on 10 calls at a price of 11.10. Now, there is no way I would want to hold these contracts longer than a day trade, because a) a bounce off major support nearly always drops back to retest, and b) the earnings news meant the IV (implied volatility) was off the charts and the options were overpriced, so even if the stock price stayed in the same range for the next several days, the options would lose value quickly. My account size limited me to trading only 100 shares of this high priced stock, but with the options I was able to control 1000 shares for an $11,000 outlay. Sure enough the bounce made it all the way to $256, where it stalled and pulled back, so I closed the position for a $3800 gain in in less than an hour. (And, as expected, MA retested $237 and broke down badly.) Trading the stock with my acceptable position size would've gained only $1700, so the options as a day trade made more sense. As other posters here have stated, many options are so liquid and the spread so tight, it's worth day trading them for more leverage on less capital outlay. APPL is another example, with the spread sometimes .01 cent and rarely more than .05 cents at or near the money. As in all trading, set your risk management rules in advance and honor them. My journal has cautionary tales of what happens when you don't do that. Best of luck to you!
Technical setups are not as easy as 'do this.' If it were, everyone would do it. Risk management consists of a set of guideline that you establish because 1) you feel comfortable with them 2) it allows your trading style and methods are enhanced by those risk management rules 3) You cannot take rules such as 'never allow a trade to lose more than x% of the cash invested' unless that fits with what you are doing. I appreciate all your questions. Youa re eager to learn. But you are trying to do too much at one time. FIRST learn how options work. Find a comfort zone that includes a strategy or two that you prefer. There is little chance that you will decide that buying options is the strategy that works for you - and that's important because your money management and risk management rules will depend on the types of trades that you make. It takes a long time to develop the skills and the rules that will suit you. My rules are totally inappropriate for you. As are the rules used by others. I know how you feel. You see big potential profits and you want to start NOW. Well, you simply can't - unless you just want to gamble. This takes a bit of patience. One step at a time. Mark
I think NoDoji covered some good points. To get started, I'd say to trade call options only in the money with a delta of 70 or better...I've had the most luck with this. Since you're daytrading, just trade the front month contract...but make sure if you're losing money that the trade doesn't become an investment until expiration. Start by trading one or two contracts on a liquid, volatile stock like AAPL, RIMM, or an ETF like SPY or QQQQ. This way you'll see a couple of important things. One, there's lots of movement in these stocks. You'll start to learn why the option is only up .70 when the stock is up 1.00. You'll also get to see how the option price starts to behave 3, 2, and one week before expiration. This is important as well. Finally, you can get in and out of these options without much slippage, which will save your butt in the beginning. Finally, and I can't stress this enough. The brokerage world wants to sell everyone on their trading platforms, low low commissions and technical analysis thingamajigs. These are all important, but no brokerage will teach you to try and beat the spread on an option contract. Other than time decay on an out of the money option, spreads will put you out of business. They are the sneakiest, most destructive aspect of high volume options trading next to commissions. So, focus on trying to buy closer to the bid and sell closer to the ask. You won't always get a quick fill, but your odds improve dramatically.