does a trader that sold naked puts and his stock went down 50% cares about those stats ? Same as swimmer that drown in the river with "average" dept of one foot. They both dead.
The wider bid-ask spread decreases the frequency of quotes. This enhances liquidity since limit order traders are encouraged to leave their order in the book until their quote approaches fair value. -segv
So reiterating your point, more open limit orders encourages higher liquidity ... makes sense, especially on lower volume options. But what about options on stocks that barely move, but have high option trading volumes to offset that liquidity issue, ie CSCO? I imagine if you could trade CSCO options with penny intervals, they'd probably carry more value.
A smaller spread leaves the market-maker more succeptible to jumps in volatility. In an issue like CSCO with a lot of order flow, the market-maker might be willing to take that risk with a smaller spread, but would also likely reduce the size of the quote. Combine smaller quote sizes with increased frequency (volatility) of quotes, and you have less liquidity overall. Keep in mind also that increased quote volatility is a major scaling issue, and directly translates to increased infrastructure costs. -segv
your example doesn't explain why trading an option makes more sense than trading the underlying, if your goal is directional only - with the option you pay for time premium and carry vega risk, you don't have these costs if trading the underlying.
of course, the allure is leverage. It takes 20x the capital to work with underlying securities compared to options to get the same price movement relative to a shallow in the money call. so compare margin interest going long to volatility, theta, and rho.
my post was questioning the benefits of buying options solely for directional trading; hence i was ignoring option's volatility as it is not a relevant factor affecting directional trading of the underlying.
ok, thanks, that's a good explanation - i'd also add spreads on the underlying vs options to be taken into the cost-benefit consideration; which confirms my sense that the allure of options is more speculative (i.e. leverage) rather than any economic advantage. also, i was primarily thinking of futures vs options, and for example, for ES the margin is $3k overnight which is at most 1x-3x the cost of an SPX option; hence the advantage of leverage is even less significant.
but with buying puts and calls, you lose at most what you put in. With futures, you're downside is potentially much deeper (all the way to 0) (thus requiring stop orders if you don't have the stomach to gamble riding out a drop).
well, you will have to manage risk with trading both futures/stocks and with options; perhaps even more carefully with options given that they typically carry higher leverage - in addition, i think that options are more (cost-)effectively used as a (partial) hedge against a naked position in the underlying, this way you don't have to ride the full time decay and volatility exposure as with an outright options-only directional position... all the best.