36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
102 Part II: Call Option Strategies
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apparently are attracted by the leverage available from options, but they often lose
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money via option trading as well.
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What many of these option-oriented day traders fail to realize is that, for day
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trading purposes, the instrument with the highest possible delta should be used. That
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instrument is the underlying, for it has a delta of 1.0. Day trading is hard enough
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without complicating it by trying to use options. So of you're day trading Microsoft
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(MSFT), trade the stock, not an option.
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What makes options difficult in such a short-term situation is their relatively
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wide bid-asked spread, as compared to that of the underlying instrument itself. Also,
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a day trader is looking to capture only a small part of the underlying's daily move; an
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at-the-money or out-of-the-money option just won't respond well enough to those
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movements. That is, if the delta is too low, there just isn't enough room for the option
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day trader to make money.
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If a day trader insists on using options, a short-term, in-the-money should be
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bought, for it has the largest delta available - preferably something approaching .90
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or higher. This option will respond quickly to small movements by the underlying.
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SHORT-TERM TRADING
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Suppose one employs a strategy whereby he expects to hold the underlying for
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approximately a week or two. In this case, just as with day trading, a high delta is
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desirable. However, now that the holding period is more than a day, it may be appro
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priate to buy an option as opposed to merely trading the underlying, because the
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option lessens the risk of a surprisingly large downside move. Still, it is the short
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term, in-the-money option that should be bought, for it has the largest delta, and will
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thus respond most closely to the movement in the underlying stock. Such an option
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has a very high delta, usually in excess of .80. Part of the reason that the high-delta
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options make sense in such situations is that one is fairly certain of the timing of day
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trading or very short-term trading systems. When the system being used for selection
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of which stock to trade has a high degree of timing accuracy, then the high-delta
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option is called for.
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INTERMEDIATE-TERM TRADING
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As the time horizon of one's trading strategy lengthens, it is appropriate to use an
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option with a lesser delta. This generally means that the timing of the selection
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process is less exact. One might be using a trading system based, for ernmple, on sen
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timent, which is generally not an exact timing indicator, but rather one that indicates
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a general trend change at major turning points. The timing of the forthcoming move |