Ignoring leverage, is there any reason to trade options rather than the underlying? Let's say I'm bullish on a stock and think the price distribution in 3M will be different from normal (biased to the upside). Textbook tells us that option prices only need depend on risk neutral probability and not on my view since market makers can hedge accordingly. Should I bother buying a call?
The great majority of options are bought as insurance; But if you want to trade options exclusively...Leverage, is the whole Purpose of doing so, I'm sure as you know...a very slight movement in the underlying...will make an options holder/buyer experience Significant moves, To trade options, however, you have to have excellent market prediction/timing abilities, Options are a ticking time bomb...sand constantly leaks away from the hourglass, water constantly leaks from the fish tank, It's harder, but options trading can be really rewarding...almost explosively so -- compared to just buying or holding the underlying, Options are the plutonium of the marketplace trading/investing world,
Well played good man. Well played. That's how you ask a question about options. And yes, to short a stock with a long ITM put prevents you paying hard to borrow rates, while simultaneously limiting your absolute (buyout, essentially) risk. I do it to sidestep interest payments, and if you're buying ITM where you pay a penny to get an absolute limit on your losers it's not bad at all. Don't use it for leverage, and don't buy options you couldn't back in cash. You're doing it right asking the way you did.
Gamma. Wholesale cost of carry. Trading volatility - actually all trading is a form of volatility trading. Essentially trading based on an expectation of variation and price. Option MMs often have more liquidity than stock specialists if there is good correlation. Leverage. Trading multiple time frames. I have a couple of dozen more if you'd like.
Let's say I feel my view of the distribution of underlying prices in say 3 months time is more accurate than the market maker. No view on volatility. For option MMs, they assume that the info is priced into the underlying hence their option model will give them a fair price. For me, if I were to ignore leverage, both underlying and option is good since what I expect has not been priced in either securities.
This is exactly why you would trade an option. Your forward price is different than the markets. The option would be cheap if your forecast is of a bigger move or expensive if it were smaller. Also consider you could both be wrong and depending on how wrong could be significant.
Think of the volatility of the option you're looking at as describing an expectation of forward prices. You buy the current implied. If your forecast is an expectation of price change larger than the market's expectation - again the implied - than the option is cheap and you would consider buying it. There is a bit more granularity than my simple example and you have to factor in being wrong. If you are into reading up on options consider buying Fari Hamzei's book "Mastertraders". It has a great chapter on how to think about volatility. Shameless plug here - I wrote it.
Volatility plays, Theta... gamma... dividend expectations... hedging underlying... lots of reasons...
get "Stock Market Wizards by J Schwager and read chapter on John Bender- made tons using options to trade his prob distro forecast.
If you are good at timing but not great, then options could be the better route. As long as you are right before your expiration. Options give you the ability to be wrong on a smaller time frame without having to be wicked out as if you were holding the underlying and had a mental stop. Just risk on the option how much you would had risked as if you bought the underlying. That way you don't get wicked out if you don't time the bottom precisely correct but still get the overall direction right before expiration.