Hey guys, let me get right to the point: I'm wondering if I might get a little "guidance" from someone who "knows the ropes" on how to trade options on breakouts... someone who does it and is good at it. I'm trying to get my arms around the best kind of option strategy to use (in the money or how far out of the money calls?) or maybe a spread (married put? bullish debit spread, something else?) to initiate for trading breakouts when volatility is high. Why breakouts? I'm an experienced futures trader and my specialty is trading breakouts of classical chart patterns (think ascending & descending triangles, cup & handle patterns, flags, pennants, coils, etc). I mostly trade 2:1 risk to reward (3:1 or more when I find good asymetrical opportunities). Why options? I'm looking to expand. Expand into additional futures markets, stocks and sector ETF's, and trade them off daily and weekly charts over a multi-day or multi-week time period rather than limit myself to the intra-day trading I presently do. I'm a disciplined trader so I know if I try and do this blindly, I'll get hammered into the ground. And (so far at least) the books and videos I've studied haven't been a lot of help on trading options on breakouts. So I thought I'd go out on a limb and see if anyone can point me in the right direction on the best way to structure these kinds of trades, so I can knock this out To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate. - Jesse Lauriston Livermore
It does not work well with options if you plan to resell them, however it does play well when you mostly excercise them. The factor here is the spread and illiquidity of options. If you consider reselling you have to be in the position ahead of the breakout since spreads widen very fast and close slowly. You would pay dearly for fakeouts. There is also an advanced play to just buying options uppon confirmation: If you plan to excercise you can play the stock leg ahead. F. example you await price to go down, go short with stocks and sell a put when it is a breakout, until confirmation you are just short which is closed fast and cheap if its a fakeout.
covered in the last post ... agree to add, option plays on decaying stocks generally have a high success rate. Not always instantaneous like bitcoin, crypto or futures trading ... but its there, it can still be a crap shoot, timing is everything. Trading the VIX pop & drops over a 12 mth period is another option, usually a guaranteed win for the reason the VIX is so volatile its historical behavior shows it, just need to pick the pattern, options or option spreads. Forget chasing the flavor of the day, pumps & dumps, take a look at VIX or an VIX related ETF such as UVXY... there are others. straight calls, puts or spreads should work
OTM calls or puts (keep cost down), with liquidity, vol in the neighborhood with 30 day historical, delta around 25 to 30 with decent gamma. Go a few months out to combat theta, last 30 days is a killer. Cheers!
Have you considered initially buying a spread around your target price to match the timeframe in which you would expect to achieve it? Obviously model and backtest first, and be prepared to modify/iterate but this would seem like a sensible starting point. Also, as @Genevian Speculator explains, only consider doing so with the most liquid options. Spread will be critical.
I am a newbie, so take my comments with a grain of salt. 1. If you are good at directional on the underlying (or futures? Since I don't trade futures and don't understand them it is a WAG), you can trade options directionally and make very good money, especially if you are good at hunting breakout. The devil is in the details. 2. If you trade breakout, why do spreads and limit your gain? So, my preference is to go further OTM if I want to lower my cost. Of course if you go further out you reduce the chance. Again, the devil is in the details. 3. What about straddle? IMHO, if you don't know the direction, don't trade.
Great comments. From a novice, thank you. Question: Usual way of playing breakout is to wait for confirmation before executing. But in options, by the time of confirmation often the anticipate breakout is already priced in so the profit is modest?