Using options to daytrade (delta question)

[phan1]

Hi everyone. 1st time poster. You guys have a great community here, and I'm happy to be a part of it. I'd consider myself an intermediate options trader. I know the basics, but it's not like I know everything like the back of my hand either. Well, lets get to work...

Let's say I'm simply purchasing American-style call options to profit from a very short-term trading situation (a day trade, or a position help up to 3 days MAX). The textbook philosophy is to buy the option with high delta, which would be deep in the money. I find that to be false because the premium is way too high! When talking about profit percent (which is how I like to judge my trades), the most profitable trade is the one near-the-money (specifically, the out of the money option closest to the underlying is best).

Am I correct on this? Why is the textbook move to choose high delta? High delta is the SAFER play, but it certainly is not the most profitable. Obviously this mostly applies to options that are not too close to expiration. Daytrading is not how I like to perform most of my trades, but I do want to take optimal advantage should such a situation arise.

 

[maxima]

never heard anyone trading pure delta... it is way too inefficient... my guess would be - to start trade things like that from scratch you need to have like 100-300K capital which can be sacrificed if it wont work...... so the basic idea if you have that kind of money you should be smarter than just outright delta trade.....

i am puzzled.

 

[phan1]

never heard anyone trading pure delta... it is way too inefficient... my guess would be - to start trade things like that from scratch you need to have like 100-300K capital which can be sacrificed if it wont work...... so the basic idea if you have that kind of money you should be smarter than just outright delta trade.....

i am puzzled.

No, I don't trade using pure delta. It's mostly a question of which option to use as a daytrade if you think the underlying is going to go up. Textbook, you want to buy deep in the money calls where delta is high. But the premium is too high, so your % gain is more limited than if you picked a slightly out of the money call. I was just wondering if people here could justify using a deep in the money call vs using an out of the money call or even slightly in the money call.

 

[etem_tezcan]

deep in the money option bid/ask spreads are huge so I don't find them suitable for day trading. When you go near ATM or OTM, bid/ask spreads narrow. For day trading, I find selling puts instead of buying calls more suitable. (long bias of course). You can profit from theta decay, declining IV or rising underlying. Furthermore the option you have sold have 0.5 or lower delta, so in fact you are playing with a smaller tick sized contract if you are cash strapped.

 

[Martinghoul]

Why on Earth would you want to trade options like this? It's wrong on a whole variety of levels. If you want the largest %age gain, i.e. leverage, you would use far OTM options. If you're using DITM options they will have the most delta, which is, essentially, what you've read.

 

[VegasClub]

Option deep ITM is like a future. An advantage to trade an option in relation to the future is only given if you can benefit from the nonlinearity function of the option. For daytrading is this advantage only given if the time to expiration is only few days because if the option runs for example one year more so the range of the underlaying for one day is not large enough to benefit from the nonlinearity of the option.

 

[maxima]

guy just read a book "how to make a million on options" and is fantasizing. he doesnt know what trade is. he just need a million.

 

[option911]

I think the key is to pick how you get long or short your delta depending on the IV of the options

 

[mikeylai13]

a few of us in the group day trade with options, we usually buy the first ITM option, i sometimes buy ATM depending which has a lower bid/ask spread.

in saying this i only day trade on the RUT and the spread is usually 40/60c. and i pretty much always get filled at mid price. and i trade until the last day but the spread moves very differently on the last day front month.

safe trading
ML

 

[tripleogstar]

well there a number of ways to benefit from a rising price without trading ITM calls, the best way is to trade OTM call spreads. If the underlying is trading 100, you could buy the 110/120 call spread for example, it will also reduce the premium you pay as you are buying one option and selling another, so the net premium you pay is less than what you would pay had you just bought the 110 call. The delta may not be huge to begin with but its a leveraged upside bet as you get longer deltas as the underlying gets closer to your long strike

 

[jimbo45]

Hi all -- Weeklys (Weekly Options) is probably the best way to "Day Trade" - these options expire EVERY FRIDAY so the best time is to look every Thursday evening for Next weeks options and trade on the Wed / Thur / Fri of "Expiry week"

List of Options that can be traded weekly is available from the CBOE


http://www.cboe.com/micro/weeklys/availableweeklys.aspx

You can download these into a Spreadsheet.

I prefer to SELL CALLS rather than BUY -- on the grounds that around 85% of the time people who BUY options usually Lose -- which makes The OTHER side of the coin - 85% of people who SELL must win.

on SELLING you gain a Premium regardless of what the share does -- and if you get "Called" then you also make the profit on the share.

True you can lock yourself out if the share rockets up -- but if you consistently gain week in week out you are increasing your capital at minimal risk

( I trade on the US market using OPTIONSXPRESS - the Amsterdam office will sign up EU (inc UK) members. Unfortunately E*TRADE only allows US Residents).

My last trade was on PCX SOLD 12 CALL contracts Strike price 23.00 USD, Shares cost me 22.81 premium 0.40c
Expiry 03 Jun3 2011.

Even with the huge fall yesterday the share is still currently trading at 22.54 so I'd still techncally make 0.06c a share if I liquidated now which I won't.

So I got 467 USD just for SELLING the Call (1200 * 0.40) - trading costs of 14.95 USD for the option -- if I don't get assigned I'll do the same next week -- a lot of these market falls are overdone.

In a falling market you can sometimes get some good premiums on SELLING NTM (Near the Money) CALLS - especially if you think the share is a reasonable one with a decent longer term prospect.

Also with weeklys if the whole market really goes against you you can usually close in time without sufferring disastrous losses

Cheers
jimbo

 

[maxima]

I am sure we all are happy for you Jimbo. But what it has to do with delta?

 

[sss3d]

The best way to trade pure delta is to use iron condors.

And price it for 2-3 months out.

If you are trading just pure delta you may sacrifice commissions, or otherwise time.

After 10-20 days, you will be able to make at least 10-20% of your original margin, due to a drop in delta.