Ambitious question about a tricky conflict

DanPickUp

Well-Known Member
#1
Hi

Today I surfed some time in the net. Nothing special, just relaxing a bit. I then felt over a tricky conflict question, which I found very interesting. In my opinion, a very aspiring and ambitious question to think over and so I like to share it here. There are various answers to that and I am wondering, what yours is. Now to the question :

""Why do you use naked itm options for directional trading instead the future or the share ?""

I had to agree, that for certain ranges, if traded with naked options, itm options for directional trades are best. Itm options have a higher delta compare to atm options or otm options. If I have a higher delta, like itm options have ( 51 - 100 ), my options will sensitive r move in context with the underlying ( Future or share ). Gamma will have little effect, when I trade deeper itm options. I also can reduce vega, when I use deep itm options, which are near expiration. The same is known with theta. As nearer I am to expiration, as less I can lose on that.

Now to the next part :

""What risk do we, take when using deep itm options instead using the future or the share ? Consideration explained like that :

If you use deep in the money options, you have to have a trading plan like you have to have one when trading the future or the share. This plan, as we know, defines the stop loss, the exit, the follow up on certain occasions, ( the repair strategy for the options, if meaningful ), and if needed other aspects.""

Finally the one point which made him asking this question was this :

""The amount of money for the stop loss used for the naked itm option or the naked underlying ( Future or share ), can be the same for both.""

Resultant from the past written comes the real and legitimately asked question :

""Why the itm option and why not direct the underlying ? What is the advantage or disadvantage of it ? Is it just that some like to trade options and others like to trade the underlying's or has it to do with strategy decisions ( Hedging ) or what is it ?""

What is your meaning to that question ? By asking and explaining this question, did he miss some points or did he fail to see some points which would give a direct clue to solve the conflict and tell : Yes it is the itm option or it is the underlying ?

DanPickUp
 
#3
Lets try Reverse Engg.

""Why do you use naked itm options for directional trading instead the future or the share ?""

Because writing Naked option is more risky. Besides higher delta always lures me.



"What risk do we, take when using deep itm options instead using the future or the share ? Consideration explained like that :


Because hedging can be done with less margin when it comes to ITM rather than future which require much more margin.


""The amount of money for the stop loss used for the naked itm option or the naked underlying ( Future or share ), can be the same for both.""


No, absolutely. Option point are equivalent to %. 1 point down in option counts as 1% w.r.t INDEX option, whereas future is not. For both SL cannot be same, may be you meant from the Support and Resistance perspective. But still being an option lover, I never support the idea much to wait upto the last S/R to be hit, as it can be very fatal when trading in option.



""Why the itm option and why not direct the underlying ? What is the advantage or disadvantage of it ? Is it just that some like to trade options and others like to trade the underlying's or has it to do with strategy decisions ( Hedging ) or what is it ?""

Less margin reqd + hegding.

What is your meaning to that question ? By asking and explaining this question, did he miss some points or did he fail to see some points which would give a direct clue to solve the conflict and tell : Yes it is the itm option or it is the underlying ?

Yes, you are absolutely right. Without pondering and spending some time no one can make much.



Thank You
 

DanPickUp

Well-Known Member
#5
Have a look at the STT treatment.:lol:
Hi Capricorn

Nice to see you still alive. STT ( Swiss Table Tennis :lol: ) or I guess you mean Taxation and Trading. Surely an other aspect to look at when choosing what financial instruments to use. I am not sure if the questioner had any thoughts in that direction.

The following has some little infos for Indian residents, in case some do not know the influence of taxation to the gained money from trading ( Every country has its own tax laws about that ) :

The STT amendment impacts

: The Union Budget 2008-2009 (Budget) presented by the finance minister P Chidambaram proposes to make some radical changes to the tax treatment of securities transaction tax (STT) for the financial year 2008-2009.

The current law

Under the current provisions of the Indian Income-tax Act, 1961 (the Act):

Investor. Long-term (holding period exceeding 12 months) and short-term (holding period up to 12 months) "capital gains" on listed equity shares and equity-oriented units of mutual funds, on which STT has been paid, are tax-free and taxable at a flat rate of 10% (before surcharge, education cess, and secondary and higher education cess) under sections 10(38) and 111A/115AD respectively of the Act.

Trader. Profit/gains from purchase / sale / trading of / in listed equity shares and equity-oriented units of mutual funds, on which STT has been paid, is taxable at the regular rate of income-tax under section 28 of the Act as "Profits...

( Source : http://www.financialexpress.com/news/the-stt-amendment-impact/279196/ )

DanPickUp
 

rkkarnani

Well-Known Member
#6
Hi Capricorn

Nice to see you still alive. STT ( Swiss Table Tennis :lol: ) or I guess you mean Taxation and Trading. Surely an other aspect to look at when choosing what financial instruments to use. I am not sure if the questioner had any thoughts in that direction.

The following has some little infos for Indian residents, in case some do not know the influence of taxation to the gained money from trading ( Every country has its own tax laws about that ) :

The STT amendment impacts

: The Union Budget 2008-2009 (Budget) presented by the finance minister P Chidambaram proposes to make some radical changes to the tax treatment of securities transaction tax (STT) for the financial year 2008-2009.

The current law

Under the current provisions of the Indian Income-tax Act, 1961 (the Act):

Investor. Long-term (holding period exceeding 12 months) and short-term (holding period up to 12 months) "capital gains" on listed equity shares and equity-oriented units of mutual funds, on which STT has been paid, are tax-free and taxable at a flat rate of 10% (before surcharge, education cess, and secondary and higher education cess) under sections 10(38) and 111A/115AD respectively of the Act.

Trader. Profit/gains from purchase / sale / trading of / in listed equity shares and equity-oriented units of mutual funds, on which STT has been paid, is taxable at the regular rate of income-tax under section 28 of the Act as "Profits...

( Source : http://www.financialexpress.com/news/the-stt-amendment-impact/279196/ )

DanPickUp
STT in case of options is chargeable only on the Premium Value !
It makes a big difference at times.
 

DanPickUp

Well-Known Member
#8
Dont know much about Options, but do understand the "Time Value" plays a vital role. One thing that can change the scenario is the time of the month when you wish to decide whether to go for Futures or ITM Option!!
Hi rkkarnani

Thanks for your participation here. Some thoughts from my side to your comment, as I think, the question points more to a short time frame :

Directional trading with itm options is best done on a short time frame. Directional trading with itm options on a big or long time frame makes only sense, when the volatility is very high. So market will move quick. But even than, he would need some special strategies to manage that comfortable.

If the volatility is small, it takes to much time for the market to move from A to B and then theta ( Time ) comes in to play against us. That is what you mentioned and you are right with that. There are other strategies to play such time frames, but this strategies are not built directly on market direction.

DanPickUp
 

linkon7

Well-Known Member
#9
I prefer options vrs underlying since it gives me flexibility in my risk reward ratio.

If i am attempting to act smart and try to catch a top / bottom, i prefer OTM option with delta less than 0.30... major benefit is the damage is less and if i am proven right, i get away with a market-pays-me-to-take-risk trade.... these trades get the step-son treatment and are normally the ones i manage to ride.... since i am in no hurry to book profit...


If i am trading with the trend and buying retracement / selling rally, then my preference is trading the underlying since here i have to make room for sideways movement that can kill my option even though i am trading the right direction....

to me, its all about my trade location....visible targets...width of the stop loss and how good the screen looks....
 

DanPickUp

Well-Known Member
#10
Hi Linkon

Very nice post :) Thanks for coming in. May I ask you : Do we speak about the same, when I just say to your first part of the post : Synthetic call and synthetic put ? If so, you also could combine that with your second part.

Or do you speak in your first part only about the naked otm option as you do speak in your second part only about the naked underlying, which is by the way a very precisely definition and description, why to make a decision for the naked underlying in those conditions and less for the naked itm option ?

DanPickUp
 

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