Many people think that swing trading in stocks can be completely replaced by trading in options.. For example, instead of buying 200 Facebook shares (FB), more profitable to buy 2 option Qty, like there and the loss is fixed, known in advance, and less money involved, etc..
Let's see how this is in practice. Let's admit, we have a swing trading system with an average time per trade 5 days and average profit per trade 1%.
———————————————————————————–
Buy signal received 200 FB shares. share price 57. Expenses $11400
If we buy at this price and sell in five days at 60,00, then we will earn $600.
Now let's see what happens if instead of 200 buy shares 2 car. For example, count with a strike 55 is worth 5,90. We buy 2 car. Expenses $1180.
If we sell colas in five days, when the share price is 60,00, we will earn everything $333
———————————————————————————–
Now let's see what will happen if through 5 days the price will stay at the same place, i.e 57,00.
If you bought and sold shares, then we will stay with our, i.e $0.
If you bought and sold colas, then there will be a loss of about -$100
————————————————————————————–
If the price went against the position and closed the position by 54,00, then
in the case of shares we have a loss -$600
in case of options -$430
———————————————————————————-
As we see, the benefits of options are highly questionable. Why is this happening. main reason, because options are melting. More and more every day. In this case, options melt for about 13 dollars per day from position. This reflects the theta coefficient. I.e, if we hold the position 5 days, by the way, options melt not only on weekdays, but also on weekends, And, actually, it will be 7 days, we have costs of about 100 Dollars. Imagine if these 100 dollars would be commissions when trading stocks, would it be possible to earn. After all 100 dollars this is about 1% of our average system trade profit, as written above. And the system turns from profitable to not profitable.
Or, allowable, just buy FB call options for about a month in the medium term in the hope that the stock will rise in price. What happens if we buy a strike? 55 by price 5,90. This means that until the price goes higher 62,9 we will be at a loss. And she most likely will not go beyond, because it is calculated on average based on the volatility of a particular instrument so that the price at the expiration of the option does not go into the money. Therefore, long-term option trading is initially doomed to failure.. Only a market maker can earn.
They will object to me — buy colas deep in the money, then the break-even point will be almost at the level of today's price. Yes it is. But then the declared advantage of the options is lost;. Because this amount will be large and already comparable to the cost of purchasing shares..
