Hello - I have never really traded options so am unclear how the profit/loss works (I understand from a theoretical perspective how it works on stocks). So if you are trading options on SPX or something (not sure if that's doable or not...), and it goes up say 2 points, what sort of profit does that yield you? Of course this is dependent on trade size, so also maybe you could clarify how trade size is determined?
My very basic understanding is that a typical option on a stock is for 100 shares of the other underlying instrument. You buy a call, for example, at $2.23, would mean you actually paid $2.23*100 = $223. If the value of the option went up $0.5, you would then make $50 if you chose to sell it. So are you quoting P&L in terms of the option, i.e. 27.34 today is really equal to 27.34 * 100?
Please excuse my ignorance, just trying to learn -
If you trade options on etf's (e.g. SPY) (which I do), your theoretical perspective from stocks is exactly correct as etf's are treated exactly like a stock. Trade size is determined by contracts.
Further, you are correct to say an option for say 1 contract of $2.23 means you actually paid $223 and if it goes up $0.50 then profit is $50. In my case the $27.34 is the profit. (If I had say 100 contracts and a profit of $27.34 per contract then the profit would be 100*27.34).
If the following question go too deep into your methodology or impinge upon anything you would consider proprietary, please feel free to not respond, however, I'm curious:
So when you are day trading options on the SPY are you trading options ....that are close to expiration? ....with strike prices close to the current underlying price?
Are there significant commission discounts and margin requirements depending on broker? Can you even trade on margin? Do you measure price movement by the price movement of the option or the underlying? i.e. when you think about the cost of covering commissions, do you think "the index needs to move $1 or the options needs to move $.05," or whatever it may be.
Y, close to expiry and close to underlying strike price. I use the underlying as an indicator only and I think in terms of where the option needs to move. It's like buying stock, you can do it in a margin account if you want. It's not quite as scaleable as using eminis but it's essentially the same game.
Thanks for dropping in. (Coincidentally I checked out your site over the weekend since mba isn't posting as frequently - I like the look of your blog and you have an impressive record in Feb!)
Thanks again for the responses - I have only really learned about options from a text book, so it is interesting to learn about it from the actual practical standpoint of how someone day trades them. I appreciate the responses -
When you say not as scaleable, do you mean there is a limiting on how big of a position you could take? What is the average daily volume of an SPY option that you would day trade? Is TD Ameritrade as crummy on options commissions as they are on futures commissions?
Thanks for stopping in - and yes, the strong finish in January has sparked an excellent start to February -
Volumes vary but yes liquidity is a concern so it limits how big of a position you can take. Commissions are probably comparably bad or slightly worse too.
Hello - I have never really traded options so am unclear how the profit/loss works (I understand from a theoretical perspective how it works on stocks). So if you are trading options on SPX or something (not sure if that's doable or not...), and it goes up say 2 points, what sort of profit does that yield you? Of course this is dependent on trade size, so also maybe you could clarify how trade size is determined?
ReplyDeleteMy very basic understanding is that a typical option on a stock is for 100 shares of the other underlying instrument. You buy a call, for example, at $2.23, would mean you actually paid $2.23*100 = $223. If the value of the option went up $0.5, you would then make $50 if you chose to sell it. So are you quoting P&L in terms of the option, i.e. 27.34 today is really equal to 27.34 * 100?
Please excuse my ignorance, just trying to learn -
If you trade options on etf's (e.g. SPY) (which I do), your theoretical perspective from stocks is exactly correct as etf's are treated exactly like a stock. Trade size is determined by contracts.
DeleteFurther, you are correct to say an option for say 1 contract of $2.23 means you actually paid $223 and if it goes up $0.50 then profit is $50. In my case the $27.34 is the profit. (If I had say 100 contracts and a profit of $27.34 per contract then the profit would be 100*27.34).
Hope that helps.
Got it - thanks.
DeleteIf the following question go too deep into your methodology or impinge upon anything you would consider proprietary, please feel free to not respond, however, I'm curious:
So when you are day trading options on the SPY are you trading options ....that are close to expiration?
....with strike prices close to the current underlying price?
Are there significant commission discounts and margin requirements depending on broker? Can you even trade on margin?
Do you measure price movement by the price movement of the option or the underlying? i.e. when you think about the cost of covering commissions, do you think "the index needs to move $1 or the options needs to move $.05," or whatever it may be.
Thanks again for your time -
Y, close to expiry and close to underlying strike price. I use the underlying as an indicator only and I think in terms of where the option needs to move. It's like buying stock, you can do it in a margin account if you want. It's not quite as scaleable as using eminis but it's essentially the same game.
ReplyDeleteThanks for dropping in. (Coincidentally I checked out your site over the weekend since mba isn't posting as frequently - I like the look of your blog and you have an impressive record in Feb!)
Thanks again for the responses - I have only really learned about options from a text book, so it is interesting to learn about it from the actual practical standpoint of how someone day trades them. I appreciate the responses -
ReplyDeleteWhen you say not as scaleable, do you mean there is a limiting on how big of a position you could take? What is the average daily volume of an SPY option that you would day trade? Is TD Ameritrade as crummy on options commissions as they are on futures commissions?
Thanks for stopping in - and yes, the strong finish in January has sparked an excellent start to February -
Volumes vary but yes liquidity is a concern so it limits how big of a position you can take. Commissions are probably comparably bad or slightly worse too.
ReplyDelete