Not quite. Here is an example: Let's say you thought S&P will most likely go down in price, but there is also a small risk of a gap up instead. The 119 Nov. SPY call is selling for 1.49, your maximum risk is unlimited, your maximum gain is 1.49. You can sell a 119/120 call spread for .48 with a maximum risk of .52 therefore decreasing your risk.
In theory, the answer is yes. Reality is NOT, do you ever take into account your slippage and commision ? 0.48 will be ~0.45 and 0.52 will be ~0.55. In long term you will loss as not many edge can help you to recover this "transaction cost". Ever think why casino never loss in roulette ? If you are betting Green and Red with a faily small "transaction cost" (zero, which is only 2.7% occurance) and you know the outcome in long term, you loss. Your broker always the winner.
I'm short the Russell 2000 right now. So it doesn't matter to me, but... the fact is the statement is true. Yes there is a lot pain from $580 to $0, but what if GOOG were $1? There are a lot of different scenarios you can come up with but it doesn't change the fact.
The solution is don't bet on a coin flip, use limit order, and inexpensive broker. The value priced into options is only that, it isn't a guarantee of probability. Your edge may give you a very different value. Also you benefit from theta decay in the case of sideways price action. Yes the broker always wins with commissions.
But that's exactly what you did. You presented a single scenario to support a larger premise. Yes, there's potentially a lot of pain in shorting a $1 stock but realistically, how many are there in the DOW, S&P 500, RUT, etc? And how many people who routinely short stocks short $1 crap? It's a weak argument.
Limit order won't help. - You need at least two legs for a spread, for SPY, the best case bid/ask for each leg is 0.01, so two legs will get you to 0.02, assuming you are using IB/TOS with commision of ~$1/leg (my TOS commision is only $1/leg due to the volume and my account size), this will add up to be $0.03 per trade in each way, e.g. 0.42 become 0.45. Don't forget you pay the same "transaction cost" when you close the position, regardless you are in profit or loss. The total transaction cost is 14%, much worst than roulette There is some ways to make money in options, but this is only special privilege to big firm (like the one that I worked before) which have several advantages (or you can call it as edge, I call it is as unfair bully) that are not available to retail traders. Due to NDA, I can't tell you how they do it, however, you still can't mimic them with tiny account and resources from your retail account The only way retail trader can make money is if you are good in direction: up, down or side way (theta trade). However, if you are good in direction, future/stock (like SPY) is the best instrument. Market makers earn slippage, but they still take directional risk. Broker is the best earner & safer in options trading.
The numbers i gave you were already worse case scenario e.g. buy at ask sell at bid in that example. If you can't figure out how to profit from options simply don't trade them is my advice to you.
Buy at ask, sell at bid ? Leg in won't work every time and you still take directional risk in this approach I tell the true and the ugly side of the option trading. I can't understand why people don't listen
Of course options are not without risk. You should weigh the risk/reward of trading option versus trading the underlying stock, if you can't find an advantage in taking the option trade do not take it.