I realized that I accept omitted the most obvious virtue of trading options instead of stocks inwards my final post: the much to a greater extent than attractive reward-risk ratio for options.
Suppose your stock strategy generated a purchase signal. You tin either purchase the stock now, or yous tin purchase an ATM call. If yous purchase the stock, yous are of cast benefiting from 100% of the upside potential of the stock toll movement, only yous are similarly exposed to 100% of the downside risk. Indeed yous tin lose the entire marketplace value of the stock. If yous purchase the call, yous volition create goodness from > 50% of the upside potential of the stock price, assuming that your belongings current is together with then curt that the fourth dimension value volition non dissipate much. As the stock toll rises, together with then does your delta. (It increases from 0.5 to 1.) But what nigh the downside risk? All yous tin lose is the selection premium, unremarkably << 50% of the marketplace value of the stock.
In other words, piece 1 may last tempted to hedge a large stock pose amongst stock index futures, at that topographic point is no require to hedge an equivalent telephone band selection position. This should simplify your strategy implementation together with trim back direct chances management costs (i.e. the belike loss on your curt futures position).
Given that I am a short-term trader anyway, I can't figure out why I accept been trading stocks instead of options all these years! (Aside from the caveats detailed inwards the previous post.)
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