Hitting a wall with options and debating trading futures

[enigmatics]

Hitting a wall with options and debating trading futures. Advice?

In 2012 I made the switch full-time from stocks to trading options. I focused exclusively on AAPL weeklies (current week) and directional trading. What drew me to them in the first place was AAPL's intraday range and the low cost of comms in order to hit my daily goal of 1.5-2% of my capital. I had a decent degree of success, but the problem became being able to maximize positions. I was always just too paranoid of the high rate of time decay and would end up cutting out early in trades for easy profit. In order to counter-act this issue, at the beginning of 2013 I decided to buy deeper in the money a month out. Initially it was working like a charm and then all of the sudden I hit a wall.

I use a combination of Volume Profile, VWAP, pivots, and divergence trading. I eluded to the fact that I was trying to figure out how to better maximize winning trades. I began studying/combining Market Auction Theory into the volume profile analysis I was doing. I know of a couple of people using that method and are having ridiculous results in futures. I've been trying to emulate what they've been doing, but in options it has been tough. I haven't been able to effectively buy levels like they can as the price of the options doesn't match the price of the chart. There is also the issue of the spread since I'm always market ordering for entry/exits. It makes it virtually impossible to open positions near the market open (usually 1.00+ spreads). I've felt at times this poses a serious problem because most of your typical liquidity comes early in the day's session. Later on in the day I'm still tyically paying .25 to .40 for my entries and it's robbing me of the effectiveness of the moves I'm getting into, especially as the volume dies out.

To make matters worse AAPL's been a complete pain the backside for the last 2 months. Minus some of the noise David Einhorn was making about iPreferred Shares, the typical intraday ranges have shrunken considerably. My expectancy is to be able to average 2-3pts a day but it's amazing how hard it's become. Ironically today was the first 10+pt range day in a while, but I missed it being long on an "outside" day and getting stopped out as the market took everything on a dive with it.

Part of me feels like I'm having to deal with too many outlier elements that effect options (i.e. Traders of the underlying stock, MM's of the underlying stock, News, Intraday Auction of the major Indices, Options Greeks, Options Writers). My trading picked up when I focused exclusively on AAPL but it was behaving differently than it is now and so I'm questioning whether I'm trading the right instrument.

I noticed many people using Market Profile, Volume Profile, Market Auction Theory, etc etc .... they trade Forex or Futures and don't waste their time with stocks/options. Any advice on this situation is appreciated. I've never hit a wall quite like this before.

 

[enigmatics]

 

[BeginnerJoe]

I'd assign the blame to poor strategy than poor instrument. A good strategy should be able to handle all seasons. If you are doing badly with what you got, perhaps you may want to flip your strategy upside down and use it that way and see.

 

[RPEX]

As far as i understand it you are trading directionally, intraday, with outright option positions. In which case i don't see why you are using options. If you are confident in playing the range just do it with the underlying.

 

[enigmatics]

I'd assign the blame to poor strategy than poor instrument. A good strategy should be able to handle all seasons. If you are doing badly with what you got, perhaps you may want to flip your strategy upside down and use it that way and see.

Come for advice and I get some snide remark about flipping my strat upside down. OK bud! Clearly you paint with a broad stroke and do not understand the problems I've been having trying to trade deep in the money options with wide spreads on a stock that suddenly trades in small ranges every day.

It's never as simple as just strategy. The instrument, risk management, AND strategy must all be in agreement. All strategies most definitely cannot be used on every trading instrument out there. Hence how all of the sudden an instrument that was working for me for a year is no longer.

Anyone else actually have some constructive advice? Have any of you found a more "technical" nature in the forex/futures market? I actually switched to SPY options today and had significant results. Going to stick with it for now.

 

[enigmatics]

As far as i understand it you are trading directionally, intraday, with outright option positions. In which case i don't see why you are using options. If you are confident in playing the range just do it with the underlying.

I do not have the capital base to trade AAPL shares. 'Tis why I went for the options. Going deep in the money a month out also allowed me to trade it almost as if I was trading the stock because the delta was high (usually .70-.80) and the theta low (.19-.30) It also kept the comms down because I was typically only trading 2-3 contracts at a time and making 2-3 trades a day.

 

[RPEX]

Come for advice and I get some snide remark about flipping my strat upside down. OK bud! Clearly you paint with a broad stroke and do not understand the problems I've been having trying to trade deep in the money options with wide spreads on a stock that suddenly trades in small ranges every day.

It's never as simple as just strategy. The instrument, risk management, AND strategy must all be in agreement. All strategies most definitely cannot be used on every trading instrument out there.

Anyone else actually have some constructive advice? Have any of you found a more "technical" nature in the forex/futures market? I actually switched to SPY options today and had significant results. Going to stick with it for now.

To be fair it was a pretty stupid question, and it sounds like you already know the answer.

Good luck

 

[enigmatics]

To be fair it was a pretty stupid question, and it sounds like you already know the answer.

Good luck

How can I know the answer without already having traded Forex/Futures?

 

[wino59]

How can I know the answer without already having traded Forex/Futures?

Question for you enigmatics: what kind of data do you relay on to take your positions? In other words what kind of data do you need to look at, in order place your trade.

The reason I ask, is Forex is not for me and futures are. But for me there is an underlying reason. I base my trading decisions on market moves and other data then just the bars, and volume, that I can not obtain from Forex, which is why I trade futures for day trades, and options for longer term positions. The only futures I trade are the indices.. /ym and /es.

If you are in the same boat as I am, then futures make sense, but if not then I don't think it would matter, and it would be what you feel more comfortable with.

The biggest reason to trade either forex or futures, is leverage. It is the easiest way to grow a small account, or bust it

 

[No Risk Trader]

How can I know the answer without already having traded Forex/Futures?

Hello, you have been given some good advice. Don't be offended but the issue is always strategy. You are not buying stocks you are trading Options. The reason your strategy now works with SPY is that your strategy is ok for what you want to accomplish....you just have to diversify. Their is never a bad day in the options market....you may take a bad position...but it has nothing to do with Equity Options. You can make money when stocks go up and you can make money when stocks go down. AAPL anchored my portfolio until it was no longer profitable on the CALL side...you should have had positions on the PUT side...remember as an Options trader you don't care what direction an underlying stock moves...you want to get paid by others who are making that bet and to the extent you can cashflow by repurchasing when they are cheaper....you never have a bad day. You should have made money as AAPL fell. YOU ARE NOT TRYING TO GUESS WHICH WAY THE STOCK WILL GO....EVER. Again you are being paid by others who want to make that bet and just cashflowing or delivering the stock if assigned. Another thing, you are not entering your orders correctly as a Options Trader. If you are doing it yourself....well....if your trader/broker is doing it, then they should pay for any positions you don't get. Options orders take precedent. Always enter as Buy To Open or Buy To Close. Thats a tip I'm sure no one has given you.

Good Luck.

 

[RPEX]

OP is day trading stocks intraday, but he cannot afford to do so, (even on Reg-T margin?), and certainly falls under the pattern day trading rule. So he switched to trading short dated deep ITM options outright. Whether he is unaware of the risks/opportunities and flexibility of options trading is unknown, but he is not taking advantage of them - he can only see a smaller capital outlay.

OP has stated that he faces wide spreads on these options, and he uses market orders. He says he switched to options because of a lower commission structure yet fails to see that the wide spread on the options probably negates that, and should always be assessed alongside the commission when looking at any new product.

Many people on this forum seem to think that there is no minimum necessary to trade certain things, and that nothing is beyond them. This is probably because of the fine tuning of the brokers' marketing machine. Whilst you may be able to bu and sell, with a very small capital base you basically set yourself up to have such a small margin of error that failure is to some extent inevitable.

Many people on here also seem to think of options as an asset class. They are not, they are derivatives, a tool of the trade, and therefore you can have them on any asset class. Seperately, OP asks whether FX Futures will be different. That depends entirely on his ability to predict direction of those underlying markets, as they are not the same as AAPL, just like AAPL is not the same as SPY.

 

[makisg]

One of the problems is that you think of the two asset classes (equity and options) as the same. This is not true, even with directional strategies. Liquidity, spreads, volume, volatility, time to expiration, Greeks etc... requite completely different thought and strategies with options.

You seem to watch only the underlying movement and ignore most of the option variables mentioned above.
I am sure you have studied enough theory on options, before trading I would suggest you pick some options historical data, trades and quotes and study how bids and asks move, their spreads, delta changes, how volatility change intraday and its effect on execution prices and quote levels to get more familiar of how to trade options.

 

[RPEX]

One of the problems is that you think of the two asset classes (equity and options) as the same.

You've just proved my point about the total absence of a lower bound on moronism on here. An option is NOT an asset class it is a fcking derivative, a tool. If you don't know how to use a tool don't use it because you will probably end up taking your arm off. OP couldn't give a rat's **** about the vol, he was motivated to use options because he didn't have enough cash to daytrade the stock. Possibly the worst reason i can think of to use options. Can anyone else think of any?

 

[enigmatics]

Question for you enigmatics: what kind of data do you relay on to take your positions? In other words what kind of data do you need to look at, in order place your trade.

The reason I ask, is Forex is not for me and futures are. But for me there is an underlying reason. I base my trading decisions on market moves and other data then just the bars, and volume, that I can not obtain from Forex, which is why I trade futures for day trades, and options for longer term positions. The only futures I trade are the indices.. /ym and /es.

If you are in the same boat as I am, then futures make sense, but if not then I don't think it would matter, and it would be what you feel more comfortable with.

The biggest reason to trade either forex or futures, is leverage. It is the easiest way to grow a small account, or bust it

All my trades are based on signals I get from where a stock price is in relation to it's volume profile (not volume histogram), VWAP, and sometimes includes divergence in a specific indicator I use (the ONLY time I ever use them).

But let's just say for example I get the signal I want at the open. If I try to trade a monthly option on AAPL deep in the money, the spread at that point in the session is typically wide. I'm talking in upwards of 1.40 sometimes. This means if I hit the open, I'm paying 1.40 premium to get into a position on a market order. This starts the position out significantly in the red. Often the delta of the deep in the money's I play are about .70 so I literally have to have AAPL move 2 pts just to get EVEN on my trade if I try to take it at the open. For the past couple months AAPL's typically intraday range has drastically reduced compared to how it used to trade, making it an even bigger conundrum.

Even if I waited until later in the session to get a signal I like, I'm still buying on spread (typically .25 to .40) if I market order. Have had a real hard time getting my limit orders on the options to match the level the underlying stock hits.

 

[enigmatics]

OP has stated that he faces wide spreads on these options, and he uses market orders. He says he switched to options because of a lower commission structure yet fails to see that the wide spread on the options probably negates that, and should always be assessed alongside the commission when looking at any new product.

This is true. At first it wasn't like that, but it eventually started manifesting.

The wide spread is a killer, particularly in tight intraday ranges. This then makes it an issue of whether it's better to use DITM for a swing directional trade. I've been married to day trading for so long now, that it's been hard to break away from it and stick to my target convictions.

 

[enigmatics]

You've just proved my point about the total absence of a lower bound on moronism on here. An option is NOT an asset class it is a fcking derivative, a tool. If you don't know how to use a tool don't use it because you will probably end up taking your arm off. OP couldn't give a rat's **** about the vol, he was motivated to use options because he didn't have enough cash to daytrade the stock. Possibly the worst reason i can think of to use options. Can anyone else think of any?

I've never declared it an asset class.

While I'm not an elite options trader, I still factor in the greeks. I am definitely a student of volume as I have mentioned previously multiple times. I also don't recall saying anywhere that options have been taking my arm off. I had gone over a year with great success using them and then the behavior of the underlying stock changed completely affecting my strategy.

BTW, so if someone doesn't have the proper capital to trade the SPY underlying, are they morons if they trade the /ES futures?

 

[RPEX]

I've never declared it an asset class.

While I'm not an elite options trader, I still factor in the greeks. I am definitely a student of volume as I have mentioned previously multiple times. I also don't recall saying anywhere that options have been taking my arm off.

No that was in reply to maksig, who positively did say that it was an asset, it was quoted in the message.

Also, vol = implied volatility

BTW, so if someone doesn't have the proper capital to trade the SPY underlying, are they morons if they trade the /ES futures?

Roughly, yes. What kind of capital are we talking here? I mean if you have 10k+ i would probably say limit yourself to 2 or max3 ES contracts and don't trade outside regular trading hours or on the open. With the SPY which is more divisible in terms of how its priced, you could probably finesse it a bit more according to your risk, but with less than 25k you'll be restricted by the pattern day trading rules.

 

[makisg]

You've just proved my point about the total absence of a lower bound on moronism on here. An option is NOT an asset class it is a fcking derivative, a tool....

Maybe get some education on proper financial terminology before picking up fights?

Asset allocation - Wikipedia, the free encyclopedia
Asset classes - Wikipedia, the free encyclopedia

If you are a plumber, you can call options a tool, but among professionals in the finance industry derivatives are asset classes.
In simpler words that you can understand.... if you buy a contract and you can resell it on an open market, you can consider it an asset.

Any further comments on moronism that I can help you with ??

 

[RPEX]

Maybe get some education on proper financial terminology before picking up fights?

Asset allocation - Wikipedia, the free encyclopedia
Asset classes - Wikipedia, the free encyclopedia

If you are a plumber, you can call options a tool, but among professionals in the finance industry derivatives are asset classes.
In simpler words that you can understand.... if you buy a contract and you can resell it on an open market, you can consider it an asset.

Any further comments on moronism that I can help you with ??

No I still think you are full of sh1t. Allocating a proportion of aum to 'derivatives' makes no sense whatsoever without describing the strategy. As a professional in the finance industry i do not rely on wikipedia to endorse my credibility - the whole thing looks like it was put together by some Bangalore wannabe, why does he define the prefix 'sub-' in such detail? oh and there are no references so i would be better off getting information from the daily star. I have no interest in 'picking a fight' on a forum.

Anyway this all looks like buyside marketing b0110cks to me, i don't really care what we call it. But conceptually understanding how options work will serve OP well whether he wants to trade options on equities/commodity futures/fixed income futures/fx futures whatever.

 

[makisg]

No I still think you are full of sh1t. Allocating a proportion of aum to 'derivatives' makes no sense whatsoever without describing the strategy. As a professional in the finance industry i do not rely on wikipedia to endorse my credibility - the whole thing looks like it was put together by some Bangalore wannabe, why does he define the prefix 'sub-' in such detail? oh and there are no references so i would be better off getting information from the daily star. I have no interest in 'picking a fight' on a forum....

Speaking about a lower bound on moronism here, nice way to welcome a new member on the board. I am a moron on my first post and full of sh1t on my second. But then you have no interest in picking up a fight on a forum.

I am more than happy to educate you this fine Sunday morning. As Nasdaq puts it nicely: Asset is any possession that has value in an exchange. Asset Definition - NASDAQ.com

As I said earlier, if you bought it, and you can resell it…. it is an asset. If you don’t sell it, you put it under the “assets” column in accounting reports.

In your little cycle of friends you can refer to derivatives as tools or widgets or anything you want, but it will not harm you if you learn actual finance terminology.

So, wikipedia does not count because it was probably put together by a Bangalore wannabe. Allrighty then how about ISDA?
ISDA - International Swaps and Derivatives Association, Inc.
Or DTCC?
DTCC › DTCC Launches Repositories For Two OTC Derivatives Classes
Interactive Data?
Interactive Data: Asset Class Coverage: Derivatives
Cantor Fitzgerald?
BGC Voice and Electronic Brokerage

They are probably all morons and full of sh1t like me, or based in Bangalore. But since you brought up the subject of your credibility (which doesn’t look good on the last couple of posts I must say) please tell us more about derivatives not being an asset.