StockFetcher Forums · General Discussion · 2-Period RSI trades with ETFs -- Using Options<< 1 2 3 >>Post Follow-up
764 posts
msg #109797
Ignore gmg733
1/2/2013 1:55:11 PM

Options are a complicated topic. What is the goal first. Are you looking to hedge, pure leverage, etc?

Since you have a 4 day hold time, you have some options. If you wanted to sell weeklys you could do that and get some good bang. Or you could buy naked calls/puts or you could do spreads. Since you have such a short hold time, I wouldn't recommend weekly options for the naked leverage play. Theta would eat you alive. Hence why the first strategy I mentioned is profitable. Then you could do delta neutral (popular with institution buyers) where you net position delta is zero. You can make money if it goes up or down. So you would be long/short an equity position and long an options instrument to offset the equity position delta.

As you can see, there is no real cut and dry answer to the question. In my opinion, if you have a trigger at $55 and are sure it is going up or at worst sideways, then sell weekly options. I don't like naked options unless you are day trading. Most folks mismanage Theta and don't know who to make respectable returns with longer dated options.

Lastly, what further options most are is a play on volatility. You can be 100% right on a trade and lose money.

Keep in mind options were originally designed as hedging vehicles. I would start using them as such until you get the hang of it.

33 posts
msg #109798
Ignore ZeroSum
1/2/2013 2:16:27 PM


Your comments are helpful.

The original trade (as in the example I gave) is a swing trade with any leveraged ETF, duration 2-10 days.

I'll take a closer look at selling weeklies -- not naked though, but put spreads, hopefully that will still have enough credit. I suppose the volatility spike that accompanies a typical RSI2 trade will help me at that point. Need to work out the vehicle, quantity and strikes.

My main concerns are 1) slippage, 2) the short duration, 3) the risk/reward of the options position should be close to the R/R had I executed the trade using the the underlying

The whole point of this is to remove overnight gap down risk.

4,689 posts
msg #109800
Ignore Eman93
1/2/2013 2:42:29 PM

Trade Futures they only stop trading for an hour a day...

764 posts
msg #109811
Ignore gmg733
1/2/2013 5:02:27 PM

If you are simply trying to eliminate overnight risk, you could hold the underlying and sell a covered option. You could do this everyday before close, but commissions would add up quick. And since you are hedged, you'd have a more limited upside from a profit perspective. I'd have to model this as I don't trade much weeklys, but it may be applicable here.

If you were day trading, I'd recommend naked intraday, but with a 4 day hold you get caught in a limbo where you start to give up reward in lieu of risk. For instance, I never buy an option 14 days until expiry, but if I buy them too far out they I'd don't get a lot of gamma on my side. Sure I get theta, but that may not be the trade I am in.

Lastly, I don't know if I was clear, but trading options for me became more clear when I started trading in terms of the greeks and not the underlying. I could have an upside bias, but how did I want to trade that. Was I looking for a gamma movement. Was I wanting to play it as theta decay. Etc.

433 posts
msg #109813
Ignore BarTune1
1/2/2013 5:23:09 PM

Eman is right. This is too complicated a question. There are too many variables depending primarily on risk appetite.

If your main concern is slippage, and you want a similar risk reward profile, you shoudn't use options at all as the differences in bid-ask spread and multiple commissions will kill your trade. If you are using leveraged ETFs, the decay factor hurts even more.

The buy 10 calls and sell 10 puts is a synthetic long of the 1000 shares. That is as close as you can get to the same risk profile as holding 1000 shares. It is far too inefficient however after considering commissions and slippage.

The advantages or disadvantages of synthetic positions often lies with asymetrical tax treatment afforded different streams of income - particularly dividends vs. capital gain treatment. Synthetic positions, achieved through the use of options, can also be effective in establishing a short position when your brokerage can't find the shares to borrow.

By the way, you will never have the same risk / reward profile while removing the overnight risk of a gap down. You will ultimately have to pay or surrender the "market cost" of such protection.

33 posts
msg #109817
Ignore ZeroSum
1/2/2013 8:27:39 PM

gmg733, BarTune1, Eman93,

Thank you for your guidance and suggestions. They were very helpful to me.

As I suspected, my best way forward is to focus on improving and expanding the system (incl. risk management) rather than jumping onto the options bandwagon (at best, later, not now).

Eman93, the futures approach is worth considering. I will read up on how to backtest ES and NQ with StockFetcher.

200 posts
msg #109822
Ignore tomm1111
1/3/2013 12:38:21 AM

If your time frame is short, look at "in the money" weekly or front month options with high delta. If you don't know what "delta" means, don't trade options and read a book to educate yourself (many available that are good). As eman suggests, futures would a good instrument to trade if they fit with your strategy.

764 posts
msg #109824
Ignore gmg733
1/3/2013 9:52:51 AM

With an average hold time of 4 days, I don't think I would be looking at weeklys for long positions especially not hedged. Theta will kill you. And depending on time, front month will kill you as well.

Hence, as most of the advice here has been 'it depends' and only trade options if you know what you are doing.


33 posts
msg #109866
Ignore ZeroSum
1/5/2013 1:53:33 PM


I modeled a few scenarios on thinkorswim using IWM as well as SPY options, and as you pointed out, deep in-the-money (to minimize theta decay) front-month calls (delta at least 80 or more) work well for a quick trade (3-4 days) on a strong pullback.

I'll also look at weeklys (have never traded weeklys before).

179 posts
msg #109897
Ignore Cheese
1/6/2013 10:47:09 PM


Thank you for sharing your filters and info over the years.

Has ZeroSum replied to you about your RSI(2) inquiry?

If not, you may want to start a RSI(2) info mining thread.
sF has a wealth of trading info using RSI(2)
and we can join forcesin mining the volumes of posts on RSI(2).

Experts on RSI(2) like TRO, Holygrail, and Kevin_in_GA, etc.
could save us time in pointing us to the important threads or posts.


StockFetcher Forums · General Discussion · 2-Period RSI trades with ETFs -- Using Options<< 1 2 3 >>Post Follow-up

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