How do you buy or sell the underlying on an index?! That would require a huge basket of stocks to be purchased.
I use options as a hedge, and I always short the underlying. Trading options long is almost always a fool's game (at least for this fool :).
To go short, I like to buy an out of the money call, with an intent to stay long on that call through expiration. It's my insurance policy, and I don't trade it. I'll then day trade the underlying by shorting it outright. It's usually one trade to get back the points on the long call, and from that point on you are able to short trade a hedged position with a known downside.
I avoid trading the calls for a number of reasons:
1) The spreads on options are absurd. In and out of most illiquid options costs you a full point. That's robbery.
2) Illiquidity. There is lots of this, which means that the market makers bend the market to do a trade on any size, and you get lousy pricing.
3) Slow order execution. I'm with Schwab, and it sometimes takes these guys as much as four minutes just to route an order to the floor. I've been wanting to move some money to a daytrading firm, but I don't want the financial risk of going with a small, privately-held entity if there is a bigger market event going down.
I would love to be able to trade against indexes that let you buy or short the index separately from the options. And in my ideal world they would break these indexes down by micro-sector within different tech areas (e.g., communications services, communication fiber optics, etc.). Some financial institution should get with the ball. |
