I am new to options and treading water. I have a very accurate method that is very good at calling tops and bottoms and a little less good at giving an exact exit. This method can generally call a dow turn with about 40 ticks so I have been trading spy options. I am frustrated because, as I just learned, I am picking the wrong ones. I have being going long the front month options which is wrong because the time decay really accelerates in the last three weeks. Suppose...for the sake of argument that I can call any and all SPY turns within 40 cents. I plane to hold these trades for three to five days but am more than willing to hold them as long as they are moving in my favor. I realize I should be shorting options but which ones? Should I short front month...three months out.....or does it vary case by case. If it does vary how can I determine which are the most likely to move the fastest as the trade moves in my direction? I am usining Interactive brokers and see their tools....just not sure how I should be using them. Since my method works fine with a forty cent stop...I see no real need for complicated startegies or hedging. For the purposes of this thread....lets just discuss which option and which month.
It's not your question, but imo people look to options as the "magic bullet", when the answer is obvious - just trade the underlying and save some on the b/a spread. More risky that way? What's more risky than a chance of 100%, or greater, loss as with ops? I know, you can adjust the leverage. But you get my point.
How large is your average winner or average trade? Even though Time Decay might be a problem, usually the options are much cheaper then if you go further out.
I dont have anywhere near enough money to trade the underlying. My biggest loser has been 50 cents and most losers are in the 10-20 cent range and rarely even that. I think in my last 20 trades ....I have had 10 winners...6 essentially flat trades and four small losers. Most of the time the trade moves 125 ticks in my favor or more. Currently, I am 80 ticks up in my SPY put but the option is actually down 15 cents.....frustrating. Obviously, time decay is killing me here. What is the process to allow time to work for me....rather than against?
Selling options is the only way where time works in your favor, this also carries unlimited risk for very limited profit. Your only option is to track the performance of further out options that will have more time value, or options more in the money that will hold their premium better. Both of these options will cost you more.
Trading ITM options with a delta of at least 0.8 solves the decay problem, not fully obviously, but enough, while still giving you good leverage so you don't need a lot of capital. The downside is wider bid/ask spreads. For example, I'm currently long some ITM calls with 0.9 delta, the leverage I'm getting on them is more than 6 times. (To find leverage you multiply the stock price by the option's delta and then divide by the option's premium - aka Lambda, the less known greek)
Ok thats a start.... I am currently long 1 SPY 144 Put with a Delta of -0.3589. I am down about 10 cents having paid 0.95 and the trade is about 80 ticks in my favor. How can I scan for the most favorable delta? I am using Interactive Brokers and they do not seem to have a way to scan for options.
Obviously, a delta of 0.8 or more means the option is ITM, so just go straight for the ITMs and make your selcetion from there.
Actually....I figured it out. The options trader on IB allows you to create an options chain which then allows you to create a spreadshet with all the greeks for any given expiration month....very helpful.