Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Ask Vendit Off-Topic Questions -- Ignore unavailable to you. Want to Upgrade?

To: Vendit™ who wrote (5477)	2/27/2005 9:18:58 PM
From: Walkingshadow	Read Replies (2) \| Respond to of 8752

Hi Jill, I have done a bit of daytrading of options, but that was quite a while ago. Personally, my view is that trading near-term options contracts (especially in the days just prior to expiry) is like playing Russian Roulette. When you win, you can occasionally win big. Mostly you are very lucky if you can get a respectable profit. Over a period of time, I see no future at all in that type of trading unless your object is bankruptcy. Maybe there are some who can trade these successfully on a routine basis, and if so, you are a better man than I Gunga Din. I know my limits, and I know a thing or two about risk management, and these are two reasons I don't get into this kind of thing. If you are going to trade in this way, I would strongly urge you to limit your trading to issues with a lot of open interest because these will tend to have more efficient spreads with a greater chance limit orders will get filled. But even then, as expiry approaches, the spreads can just crucify you. Note, for example, that the front month QQQQ contract at the 39 strike is bid at $.10, but offered at twice that price---$0.20. finance.yahoo.com I know all about the party line re limit orders, but this is not quite what it's cracked up to be. You can of course set limits, but that in no way guarantees an execution, even if you are on the inside bid/ask, and even if you step in front. The options pits know who they are dealing with, they know you are a retailer. So, often, they will ignore your limit, and just kill it unless the contract moves and the spread passes you by completely, in which case you could have filled with just a market order anyway. Either way, limit or no limit, you can be sure they will find a way to beat you on the spread, and that can make a huge, huge difference at times (e.g., the March 39 contract above). I would not underestimate this: the spread is huge, relative to the price. That would be like trying to trade a stock with a bid of $25 and an ask of $50, knowing you'll get the worst possible fill on both sides of the trade. If you are long, you'll get filled at $50, but the bid is $25; are you sure that you want to be long under those circumstances? That requires a huge move in the inside bid for you to just break even. It is not enough to just be right about the direction of the move, you also have to have a very big move. Possible.... Just not likely. Personally, I don't like that kind of risk/reward profile one bit. Options pits are no place for the weak-kneed, and I strongly urge you to not commit any money to speculative options trading (there are very conservative strategies as well) unless you are fully prepared to lose every single penny of your risk capital. My approach is very much like Reid's. I don't trade options very often anymore, but when I do, they are swing or long-term positions, and very rarely involve front-month contracts. T P.S. If you trade options using limits, I think it is very illuminating to watch the trading, and see what the last fill and the inside bid/ask are when your limit order executes, then watch what happens to the bid/ask and the subsequent executions after yours. Do this routinely for all your options trades. What you find may surprise you.