by Teresa Lo
This question was sent in by a subscriber:
T, could you help with options purchases?
I have been starting to put your options method into practice, both live as well as paper trading only. The difference between the ask and bid is substantial at times. Enough to require that the trade must make a pretty decent move in my favor to make up the .10 to .20 spreads I sometimes see at my entry point. Do you just buy at the ask or do you bid it down if the spread is .15 to.20?
Also, you mention that when the trigger is reached you would let it settle out for a few minutes to prevent getting caught in gyrations right around a significant support or resistance level. Do you watch on a small time frame like 5m and let it make a bar or just give an arbitrary few cents before entering?
I did the DIA Jan. put but stopped out that first day. Today I noticed the Feb. 106 puts had about .15 and sometimes .20 spread when you posted the switch to Feb expirations today. At least on paper, I would have entered at 2.65 and ended the day slightly positive.
I also paper traded two Dow stocks on their first retrace after breaking the recent up trend – IBM and DD. Both would have been picked up as Feb. in the money puts upon breaking the prior days inside bar. Obviously, I wish IBM was not just on paper! It hit both targets today. These options also showed .15 and .20 spreads throughout the day and sometimes it would expand and contract with very little price movement in the underlying symbol.
When it comes to swing trading with options, the spread between bid and ask is often just as you report, and there's not much we can do about it. The alternative is to simply be long or short the underlying stock, but the downside there is that it could gap up or down against us, and it might be a lot worse than 20 cents. In my mind, the price I pay to sleep at night when I swing trade with options is worth it. I'm hoping to make a few dollars, so I have to give up a few dimes.
When I buy options, I put in a limit order 10-15 cents above the offer just to make sure I get filled, but enough to avoid any deadly price spike. When I sell to close a trade, I just use "market".
The trigger price for swing trades is often set at the previous day's high or low. Market makers and specialists know that this is an action point for a lot of traders and they generally take advantage of the fact that sell orders usually gather just under the previous day's low while buy orders usually gather just above the previous day's high. Quite often, when these areas are hit, the stops are elected while the orders actually become market orders. The result is a big price spike. In order to avoid this, we should not act on our options trades until the spike in price is over, and usually, you can monitor this by watching volume spike and then go back to normal.
There are other ways to deal with this, such as wait for an intraday retracement to get in, etc., similar to how we deal with gaps.
04.01.14 13:27 #