Trend Following with options?

What is the best option strategy to trade directionally long term? If I just buy an option I lose more in theta than gain in theta. If I buy ATM and sell OTM I don't know what to do when OTM becomes ATM (if I want to close the spread, sometimes I get less than I paid). Below is a distribution in points profit of my trades, made with futures. Options strikes are every 50 points.
94
-59
-36
-67
47
119
31
-55
50
455
171
311
-36
46
-118
-108
221
17
-231
656
-208
-121
107
175
380
587
372
-340
39
-63
35
-31
-76
-87
76
198
-3
122

 

Of course I meant "If I just buy an option I lose more in theta than gain in delta".

 

The best option result is primarily due to the size of the move and the time it takes to achieve it... and to a lesser extent, the amount of slippage and IV change, if any.

Being outright long gets you more of the move but is more susceptible to decay and being wrong. Spreading reduces the decay cost and reduces the downside but does not participate in excess of the big moves.

The only way to answer the question is to simulate the results of each strategy against your trading whether it be real or paper.

 

I've tried that and couldn't find anything better than futures. My experience with options is very limited, that's why I asked here.

 

I actually think you could make greater returns using options than just outright futures. If you don't have any experience with options I wouldn't try it though.

Also, I don't really feel like a trend following "system" lends itself that well to options trading. Jmo.

 

I think that too, I'm just don't know enough about options to use them profitably.

 

I too combine trend following with options. It is one of the strategies I use and have been doing it for 5 years. When it goes well I can make up to 10%/15% a year in my account. If you want to "double your money" good luck with buying options, daytrading or whatever you will do. Please remember that almost everyone can make money by buying an option or by daytrading but almost no one can do it consistently, that is year after year after year.


You must be very clear on what trend following is all about and you must have a system.

Your system can be for a longer term and basic ( mine is and can write it on the back of a napkin ) but you have to follow it all the times no matter what. That is hard to do. The vast majority of traders with a system do not follow it. They do not have discipline. While discipline is not a sufficient condition to make money, it is a necessary condition.

However if you can do it, trade the major indexes like SPY or the ES futures. Let's say that your system gives you a bullish signal then you sell naked puts, if instead you get a bearish signal then you sell naked calls within 30 days of expiration.

Note, you never try to "catch" tops and bottoms. You just go along with the trend and sell options with the trend not against it. In addition to that your option selling should be systematic as well. Same way for your risk management.

If you can be totally systematic then you will not need to guess where the market will go next. It is essential because it helps to avoid emotional and financial burnouts. Your time is spent only in managing your trade, not in attempting to predict any future event

 

the best way to trade options is DAY TRADE them.

why?

options are magnifier of the underlying, a tiny move for example AAPL drop 5points or up5points, most OTM will be easily doubled/tripled. while such multiples move can be achieved in half hours or 3~15minutes. for the underlying aapl, it may move like 1%.

I do not suggest to apply long-term strategy to options. trend following is the best strategy for long-term investment (not derivative tools).

I bought some SPY 137 call at 1.11, looks it already printed 30~40% gain.

so never try to do option in long-term perspective, gains are very evaisive.

 

my OTM spy call 137 in 1.11, doubled. out 90%, wait for retractment to get more
aapl 600 call in 3, sold all at 8.3 start towait to buy 620 call

 

Example:

QQQ trading at 66.77

according to your system, trend is up....time frame.... 3 months

Buy JUL 69 call for 1.4 sell Jul 71 call for .7..net debit -70c

Put a stop at 50% ,so you exit when the option's value gets to 35c
Max profit : 2-.7=1.4, so with max risk of 35c and max profit of 1.4 your risk reward is 1 to 4.

It will be a good idea to have a put spread on a down trending stock at the same time, so your portfolio is balanced...


Good luck..