I’ve been trading options for about five years. I trade on Interactive Brokers, almost exclusively swing trading. My time horizon is usually 1-3 days. I try to keep my average position size between $1K-$2K. I trade a lot of index options, SPY and QQQ, but also big name stocks and occasionally smaller stocks with larger spreads. Lately I realize poor executions and trading costs are really eating into my bottom line. I can’t keep having my risk reward ratios heavily skewed by friction costs. So I want ask experienced traders, traders who have actually spent time considering this issue and done some math, which expirations and strikes are best for minimizing costs while swing trading? Generally I tend to buy options which are slightly in the money with expirations about a week or two away. I don’t like to buy options with distant expirations, even though that minimizes theta, because the premiums start to go way up which inherently increases my risk. OTM options obviously have more time decay because you have to buy more of them to get the same size in dollars. But very deep ITM options cost more and spreads get bigger. So what is the sweet spot? If you are swing trading very liquid options like SPY or AAPL what kind of strikes and expirations do you use to minimize both time decay and spread costs? I realize every play is different. I don’t abide by any hard rules when it comes to my strikes and expirations. But I’m talking generally here. Generally which strikes and expirations will cost me the least when I’m swing trading less than a handful of contracts for equities like SPY? Thanks all for your advise and opinions on this one.
As a stock replacement, I prefer to look at the options with about a 70 delta. There is no science behind my preference. Even in liquid options like SPY/AAPL, you will still have to work your order vs market orders to get fair price discovery and keep you entry and exit prices from eating cost.
I've always felt like the VIX inherently took care of premiums when markets get volatile. I feel like that has NOT been the case the last few weeks. It's been strange, we're just now hitting 30 on the VIX but the daily downward push has cumulatively felt like we should be getting a bit more. You have MM's backing off the spread and pulling liquidity, yet I feel like we aren't getting the typical VIX spikes associated with something like that. One of the mistakes I've made over the years is moving away from something that works well in order to compensate for a short term anomaly or dislocation in the market. My only advice is not to do that. I don't have an answer to your question as I don't know specifically what you're putting on...but this market will not retain this pattern and behavior for much longer.
There are many concerns with the paragraph above -- imprecise understanding of time and delta and market risk can lead to sensible-sounding, but *unprofitable* trading. Regardless, using your TWS data to sharpen things can really help. Set a QuoteMonitor page from which you can offload data into a .csv file* for importing into a spreadsheet. On that page, put your front expiry options (by strike, calls first, then puts, for maybe 20 strikes) and then the next expiry, for maybe 6 or so. Run some simple differences on these strikes from week to week. (Or, expiry to expiry.) What you will see will *hugely* inform your trading. *(Hit the down-arrow under File (upper-left of TWS screen), and explore. Go for "Export to .csv" NOT Export to Excel, then copy it into Excel.)
1st I'd like to say that a first time poster should look to respond to comments in a reasonable time, whatever that is, or we feel like we are wasting our time and just talking to other members. 2nd, I'd like to respond to tommcginnis. I'd say this is way too complicated for what was described as a swing trade in liquid symbols to be long or short as a stock replacement. This was the question. I believe it is best to keep this kind of trade simple. IMO, avoid options expiring this week, choose a higher delta options but not too high-this will reduce decay and focus on options that are still widely traded by customers vs only MM and you can buy less options to meet your delta to keep variable costs down.
Good way to put it, didn't think of it this way. Robert, do you have a minimum open interest? Kind of like stock traders have a minimum daily volume filter.
Not really. When I enter option orders in liquid symbols I make the assumption that if I don’t take offers or hit bids, that I have to wait to give a MM a little vig to get filled. They don’t care about opening vs closing the way a retail account does. It is just another trade that drops into their position file like ingredients in soup.
With all *due* respect, RM -- someone who finds taking differences "too complicated" should not be trading.
tom.. are you talking about the differences between intermonth per strike, IOW chart the calendars? ie chart the vacillations between the iv's?