Only trading options instead of stocks?

Discussion in 'Options' started by 1a2b3cppp, Mar 23, 2011.

  1. I just read somewhere that said any stock position can be replicated with options, and then it went on to talk about how it's advantageous to do so with options instead of buying stock.

    What's this all about?

    So like if want you be long a stock do you just buy a call instead? How would you determine what strike price makes your position equivalent to having bought shares instead?

    I guess the difference would be your long stock position lasts forever and your option expires eventually.

    Was whoever said this crazy or is there a reason why one would want to use options instead of stocks for general positions?
  2. Maverick74


    You can replicate a stock position with options by being long a call and short a put both of the same strike. It trades tick for tick with the stock and you only need 20% margin vs 50%.

    To replicate the same share exposure, just create the same deltas with the options as with the intended stock position. So two ATM calls have a delta of 50 and would equal 100 shares of stock.

    Options allow you to trade positions without using stops. But you pay for that privilege through the premium of the option.

    Options also allow you to add to winners and reduce your losers through the use of gamma. Long options will increase in size as the underlying moves in your favor and will reduce your position when the stock moves against you.
  3. 1) You have to understand the "synthetics" better. :cool:
    2) A long-call option plus a short-put option, (with the same strike price and expiration month), is equal to long-stock. :)
    3) Two, long-call options, bought at-the-money, behave "similarly" to 100 shares of the stock. The total delta of the options is ~ = to +1.00. :p
    4) Two, short-put options, sold-short at-the-money, behave "similarly" to 100 shares of the stock. The total delta of the optons is ~ = to +1.00. :D
  4. Magic8


    Be careful with options. They are like milk: they all spoil, expire, and have to be thrown out. You can waste thousands of dollars buying these decaying assets. You have to be right on the direction (up, down, or even sideways) in order to have any chance... You can also sell them...
  5. those selling you the options are not stupid (most of the time) , thus there is usually little edge other than you being RIGHT about something regarding the stock price movement.
  6. Thanks for the info.

    Ok as you guys know (because I state it all the time), I cannot predict price movement. so I basically buy index ETFs in such a way that I either make money or I eventually make money (average down basically).

    In doing it that way, I guess what I am "paying for" is the fact that I might be in draw down for a long time. It's not really an issue for, however, because I don't care. My time frame is months/years/whatever.

    It seems with options, I would be giving up that luxury.

    Am I correct in that with options, you have to sacrifice one or the other. In other words, you don't have to guess direction correctly, but you pay for it with the possibility of expiration. So if you bought a straddle that never expired, eventually you would make money. Of course, options expire.

    And with stocks, you do have to pick direction, but you don't necessarily have to have the time correct. In other words, a stock position can go against you for years and then come back in your favor and you win.

    Options: don't have to pick direction, but pay for it by having to pick time

    Stocks: have to pick direction, but there is no time limit

    So is there any way to use options advantageously along with, or instead of, my stock trading strategy?

  7. A number mistakes in there. Example: show me one example of an ATM non-worthless call that has a delta of 50, and I would overlook the other mistakes?
  8. Firstly, i'll let my good friend Paul Tudor Jones say one thing:


    Secondly, unless you have a real edge options are basically a more expensive way to trade directionally (higher spreads/commisions).

    The only possible upside to buying calls or puts as a directional trader is they prevent you from doing something catastrophic, such as deleting stops or averaging a loser and one day blowing your account the one time it doesn't come back :D
  9. you can use option to reduce risk, but most spot/directional use it to increase leverage (risk).
  10. Maverick74


    All ATM options have a delta of 50 plus or minus semantics. It's THE definition of random walk. Go back to class TJ.
    #10     Mar 23, 2011