wayneL
VIVA LA LIBERTAD, CARAJO!
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OK let's get down to brass tacks and the basis of my criticism.
We can define our risks by a set of pricing nuances known as the Greeks.
Lets assume for a moment that Bill's system has a positive expectancy (even though he has offered no evidence that this is in fact so).
The first and most important Greek in the daytrading context is Delta. No matter what instrument is being employed, the first decision one must come to is the the number of deltas appropriate for the account size. This will depend on how much room is allowed for the trade to develop... AKA the stop loss and its relationship to maximum accepted risk.
Too many deltas for the account size and/or method (IOW too high a maximum risk) and there is a high risk of ruin, even with a positive expectancy system.
Let's suppose we have decided on 1000 deltas of exposure, to pick a nice round random number.
We can achieve that 1000 deltas by trading 1000 of the underlying, or 1000 CFDs.
If we want to use options, we need to multiply the total delta exposure desired, by the individual delta f the option. For instance if we are using ATM calls with a delta of 0.5, we would need 20 contracts. ie 0.5 delta x 100 contract size x 20 contracts = 1000 deltas.
This brings me right to contest risk (bid/ask spread + commish). I don't know the commission on ASX stocks and options these days, because I trade US options, but I'm guessing the commish on 20 contracts is higher than 1000 stock/CFDs (let's leave futs out of it for the moment).
The spread component of contest risk of the stock/CFD is one or two cents x 1000 = 1000c - 2000c... $10 or $20.
The functional spread component of contest risk of the option is going to be five or eight cents X 100 x 20 = 10,000 - 16,000 cents... $100 to $160.
Next Greek is Theta. This may or not be a factor in a day trade, but depending on days to expiry and time of day, it could be a few cents. Every cent theta in this example costs you $0.01 x 100 x 20 = $20.
The +ve Gamma will generally theoretically work in the options favour, but probably will not be a factor with the small intraday moves being traded.
Vega, if a factor, could go either way, but not likely a big factor.
These factors add up to the "cost" of using options being in the order of many magnitudes higher than the underlying or CFDs.
Bill likes to highlight the juicy wins, which none of us have any doubt occur from time to time. But all experienced daytraders know that the size of wins is totally irrelevant. What matters is what filters down to the bottom line. The sum of wins. minus the sum of losses.
AKA EXPECTANCY... all that contest risk works directly against expectancy and will change a notionally positive expectancy system into a negative and loss making expectancy.
More later
We can define our risks by a set of pricing nuances known as the Greeks.
Lets assume for a moment that Bill's system has a positive expectancy (even though he has offered no evidence that this is in fact so).
The first and most important Greek in the daytrading context is Delta. No matter what instrument is being employed, the first decision one must come to is the the number of deltas appropriate for the account size. This will depend on how much room is allowed for the trade to develop... AKA the stop loss and its relationship to maximum accepted risk.
Too many deltas for the account size and/or method (IOW too high a maximum risk) and there is a high risk of ruin, even with a positive expectancy system.
Let's suppose we have decided on 1000 deltas of exposure, to pick a nice round random number.
We can achieve that 1000 deltas by trading 1000 of the underlying, or 1000 CFDs.
If we want to use options, we need to multiply the total delta exposure desired, by the individual delta f the option. For instance if we are using ATM calls with a delta of 0.5, we would need 20 contracts. ie 0.5 delta x 100 contract size x 20 contracts = 1000 deltas.
This brings me right to contest risk (bid/ask spread + commish). I don't know the commission on ASX stocks and options these days, because I trade US options, but I'm guessing the commish on 20 contracts is higher than 1000 stock/CFDs (let's leave futs out of it for the moment).
The spread component of contest risk of the stock/CFD is one or two cents x 1000 = 1000c - 2000c... $10 or $20.
The functional spread component of contest risk of the option is going to be five or eight cents X 100 x 20 = 10,000 - 16,000 cents... $100 to $160.
Next Greek is Theta. This may or not be a factor in a day trade, but depending on days to expiry and time of day, it could be a few cents. Every cent theta in this example costs you $0.01 x 100 x 20 = $20.
The +ve Gamma will generally theoretically work in the options favour, but probably will not be a factor with the small intraday moves being traded.
Vega, if a factor, could go either way, but not likely a big factor.
These factors add up to the "cost" of using options being in the order of many magnitudes higher than the underlying or CFDs.
Bill likes to highlight the juicy wins, which none of us have any doubt occur from time to time. But all experienced daytraders know that the size of wins is totally irrelevant. What matters is what filters down to the bottom line. The sum of wins. minus the sum of losses.
AKA EXPECTANCY... all that contest risk works directly against expectancy and will change a notionally positive expectancy system into a negative and loss making expectancy.
More later