I have been using this strategy (with liquid ETFs) for years. It's a great strategy. You just need a technical or discretionary system to trade directionally. For other readers, it's important to remember that the possible loss is 100%.
I assume drcha you are talking about buying deep ITM options with no/little premium, or are you talking about buying the underlying and a deep OTM put? My question to you is: I enter the trade because of my directional view, if so, wouldn't it be better to buy ATM or OTM options? Thanks.
Hey Chef, yes, I mean buying the options. The deep ITM options have little vega or time value, so you don't have to worry about decay. Yes, the leverage is less than with ATM or OTM, but you don't need that: you should be able to get plenty of leverage without it. It's a strategy for a small percentage of your portfolio.
Thank you. Another question if you don't mind: I always wonder why the counter parties want to sell if both vega or time value are minimal? What do they get out of the trade? Regards,
Because the buyer will buy at above intrinsic value... From sellers perspective; If the stock is around 100, and the 40 call is 59.90 bid @ 60.10 and my offer gets lifted, I hedge with buying the stock at say 100.02 and get 8 cents above intrinsic value... I than could try to buy the put at 1 cent or 2 cents if necessary... but probably not since the risk is 60% out of the money... you could probably even get a higher strike put for 1 cent... all depending on your risk and expiry date
So like you said it is risk free $ for them, though only a few cents they will add up if they have large volumes. For us small traders, it is risky for us and risk free for them, not a fair fight. Regards,
That's why you shouldn't really trade ITM options. I get some want to have the extra leverage in their directional trades... but does that really outweigh the added risk of less liquidity?
There is actually no good solution: I actually tried ITM, ATM and OTM. For thinly traded options, OTM was actually worst. Why? ITM I could always get out with below intrinsic prices, OTM often when I really needed to get out, I could no get any MM bids. So why am I still doing it? I do it if the overall cost, factoring in all of that, is less than taking out a margin loan and accepting time decays to avoid margin calls. Margin calls were very detrimental to my trading successes in the past: Forced me to buy high and sell low or buy low and sell lower. I really enjoyed reading your posts. Thank you sir.
Can you do the stock instead of below intrinsic? Because that might save you some. If you're allowed to do that, depending on certain factors, you then just exercise if needed and that way you might be better off.