Re: Using Puts as substitute for Short selling
This strategy is not effective for most day traders, and
in general, long options positions are a losing proposition.
In all but the very most liquid runs (such as INTC), spreads
can range from 1/4 to 1 pt, and for the most part, you will
always have to deal with a market maker as a counterpart as
liquidity in options is very low. So, to be kind, we
take a $10 put, and a spread of 1/4 point. You are
then paying away 2.5% of the position each way. Its
conceivable you might get lucky and cut it 1/8th each way,
but that is in fact because the underlying has moved and
the market maker knows you are off the market. Now
compare to say a $25 stock with a spread of 1/8: 0.5% each
way. In fact, there is a good chance of shorting a teenie
over the bid reducing the cost further. In addition, you
may encouter 'routing' problems with your orders. Many
times you will find your broker routes to CBOE yet the
bid/offer you want to take is on AMEX. You will then have
to have the order rerouted manually.
Second, remember that options do not move the same as
cash except for deeply in the money issues. At the money
options have a delta around 0.5, meaning a 1pt move in
the cash will result in approximately a 0.5 pt move in
the price of the option.
Third, long options traders assume the risk of
implied volatility dropping, as well as daily (and accelerating)
time decay. A trader in cash does not have these risks.
Fourth, not all stocks have listed options available.
Summary: Long puts are a poor subsitute for a trader
looking to day or short term trade a short. |
