I have a robust ES trading system using Daily bars, holding trades up to about 2 weeks and building positions up to 10 contracts at a time. I don't have enough account capital spare for this, so I looked first at SPY. If I traded 100 share lots, then my max position size would be equivalent to just 2 x ES, which is very manageable. But then I looked at SPY options and the leveraged ETFs, SSO etc. Assuming a simple long option strategy : ATM and a couple of months out, so low time decay, could someone clarify for me which is the better approach, please - SPY option or leveraged ETF ? Thanks, J.
levered etf's can be dangerous- if you haven't heard already just do the math going up 10% and down 10% and you end up losing 1%. if you are holding for a while the static in the market slaughters those etf's.
Leveraged ETFs are daytrading vehicles as their objective is to match the daily return of the underlying index. The return over several days greatly depends on the path the index takes, so I would advise against using them as a substitute for two-week trades. Options are not perfect either, you have time decay, volatility, delta,... Personally, I'd go with ITM options (delta 0.8 and more) and not too far out.
I would recommend you against using leverage so SPY is your best option. 2 x ES is the amount big enough to trade without leverage. Slow and steady wins the race.
Thanks for the responses everybody. MTE - ITM to reduce time decay and not too far out to reduce cost ? If you had a short signal today, with a max likely hold of 2 weeks (and of course possibly much less), which option would you choose, please ? Somethng like an August 95 put SWGTP or a Sept 93 put SWGUO, both around $550 ?
Here is something you may find useful: http://yahoo.optionetics.com/yhmain.htm also your trading software should have some type of position analysis. Good luck, indexes starting to roll over a bit.
ITM to increase the sensitivity (delta), so that it moves more closely with the underlying. Also to reduce time decay and vega. Staying with shorter expirations also helps reduce the vega and increase the delta. Aug 95 put is only -0.6 delta and Sep 93 is -0.5, which is definitely not enough. I would be more in the 102-105 range for Aug or Sep, and would probably consider July options, which still have 30 days to expiry. For July I'd be in the 100 range.
Thanks, MTE : last night, I read up on some Larry Connors stuff where he suggests using deep ITM options for this kind of method (his examples actually refer to SPY options), very much as you suggest. My understanding was NOT to hold a long option under 30 days or so (for swing trades), which is why I would have gone for August or September, albeit at higher cost. I'll revise some McMillan to remind myself of the impact of vega - I've never gone beyond checking delta - and pull up the chains in either OptionStation (I chart with Tradestation) or IB's TWS. I want to properly understand the pros and cons of staying with shorter expiration, which I take as "about 1 month out" in this case. Maybe I'll actually trade both 1 and 2 months out : nothing better than having real money on the table to focus the attention. Thanks again for all the other replies to the thread.
Yeah, I would suggest pulling up the option chains and comparing the greeks across different strikes/expirations. Trying out both with real money is also a great way to learn. You'll be able to see in real time how each one behaves and what works better for you.