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I'm used trading SPY but I want to use some leverage on some trades by using options.
Here's a sample situation:
SPY trades 205.
I want to take a LONG trade.
I think it SPY will go to 210 in the coming days/weeks.
I will keep it max 30 days.
How do I choose which call option I want to buy (which expiration which strike)?
What will get my the best return?
I'm willing to loose my entire stake I put in this option trade if it trades below 205 in 30 days.
Can you help answer these questions from other members on NexusFi?
I am new to options as well, I have traded shares & CFD's for quite a while (and been caught with a lot of useless and expensive advice over the years). I am researching as much info as I can about options and learning how to determine the "best" strike and expiry to sell. Firstly determining the direction and then the strike taking into consideration my risk as well as how much I am prepared to own those shares or not.
Taking a shot at both questions here. As for "best" anything whether it be returns or strike selection it is important to understand that options are priced around probabilities.
When you are trading something like SPY options you are trading in probably one of the most liquid and efficiently priced markets in the world. The prices are perfectly priced. Given time the probabilities play out exactly as they should.
The computations used to calculate these probabilities involve time and volatility. There will be no inherent edge for one strike over another if the liquidity is the same.
Strike selection really comes down to whatever you want to do since you can take profits anytime you want. You can select strike based on how much you are willing to risk. How long you want to be in the trade. Are you buying premium or selling it, is Implied Volatility Rank high or low? Are you collecting Theta decay or looking for Volatility contraction or expansion? Do you want more Gamma risk...or less? etc....
It's a big question but once you understand the mechanics you will have an answer for whichever environment or goal.
In your scenario, you're best return will be buying a 30 day option and trading a vertical spread.
Buy the 205 Call's to get the upside, but at the same time sell the 210 Call's against it to create a vertical spread.
This will give you upside ONLY up to 210, but for doing so, you receive premium to offset the cost of your 205 Call's and your only downside to this is if SPY goes above 210 before the 30 days are up, your gains will be capped.
Net Net, you lower your initial cost which lower's your max risk, lower's your breakeven price and increases your probability of profit.
Determining which expiry to sell is really tough for me. I've been given a lot of advice, but usually found it coming off a little skeptical misguided, even. I'm going to go out on a limb here and say that there really is no best for very long and with all the fluctuation, you just have to be able to have a certain insight.
Well, actually there is a fairly simple math solution to all this.
I'm not familiar with TradeStation, but I'm sure they have tools to help you achieve a similar thing.
It's all about Probabilities. If your target is 210 on SPY, and it's currently at 205. Most platforms have a way for you to calculate probability of hitting 210 by a certain date. You can pick your expiry based on that statistic alone.
If you pick an expiry where there is a 10% probability of hitting 210, that's probably too soon. If you go out a few expires and notice the probability is 35%, you may have gone out too far.
The idea is to stay consistent by using the probabilities to always find an expiry that suits your time frame.
The period between 45 and 15 days to expiration has the most rapid Theta decay in the Theta Decay Curve. And therefore will yield the highest return on the capital you are tying up when selling premium.