I will be trading a very simple , mean reversion system. The system scales in to go long on pullbacks and goes short on extensions to the upside. I will be holding the positions on average 2 to 10 days. Because of limited capital ($20.000) I was thinking of either trading options, which I am familiar with or futures which I am not. Can anyone who is familiar with both , tell me which one would be the better way to go, as far as lending itself to this type of trading and profit potential. Thanks.
OTM (Out of The Money) options would be best due to their low delta which will match your low capital. Also their bid/ask spreads are relatively tight.
OP. be careful buying OTM calls for a rtm to the upside b/c vol crush will crush you (yes i learned the hard way!). another tip for playing rtm: have a stop b/c the market doesn't always reverse after being overbought/sold (yes learned this the hard way too).
Options are more complicated. You have to worry about the volatility. I'd recommend paper trading both systems and see which one works best.
Though only moderately familiar with futures (a bit of trading them), UL vs. its options is pretty much the same across the board. If your system is viable and you are a disciplined trader, the underlying is usually a better vehicle for scalping/swing trading. As someone mentioned, options are far more complex. Their spreads tend to be wider and you have to deal with delta, IV and time decay. In return, you get leverage which is more worthwhile for sizeable moves. For big moves, go for leverage. For modest moves, go with the UL.
You will need a VERY significant move in your favor to profit with a long call or put. When you are entering after sharp moves to the upside or downside, volatiity is up and priced into the option. As volatility pulls back, your position will suffer. Add the spreads and trading costs, and you will be up against a hard wall. Not a good strategy. If in regard to futures, if you are talking SSFs (futures on stocks), they are not a good vehicle. Very thin volume and they don't track the underlying perfectly. Keep working on your strategy, backtesting and perfecting, and trading a simulator while you build up your account. Don't try to take shortcuts. The market will still be here waiting for you when you're ready. Good luck.
Thanks for all the replies so far. I will be trading large ETFs namely SPY, QQQQ, IWM. Which have narrower spreads for options. Would be worthwile to look into futures for these vehicles rather then options. What would be the advantage, disatvantage.
Thanks for all the replies. I should have been a little more clear. Basically I am looking to trade SPY, QQQQ or IWM. Would trading futures be a better way then options foe these ETFs?
The answer is no. If you don't know futures trading and the daily futures trends then your mean reversion strat will not work. Options are more suited for your strat.
also remember that futures have much more risk than long options. with options the most you can lose is the premium, not w/ futures. you could use futures w/ a hedge in options though. if you want to capture more of the move try buying more ITM options for a higher delta (no option w/ replicate the 1 delta of futures but you prob don't need that anyways). i'd suggest anywhere b/w .5 and .75. a caveat: ITM options are less liquid than ATM but this can be overcome by trading them on liquid UL's like you plan to and working the bid/ask w/ limit orders.