Trading intraday fluctuation vs. volatility-based option

Question

Recently a question was asked about actively trading stocks based on small fluctuations in price.

It seems like if you wanted to do the strategy described here, you might as well buy an option like a long straddle, which generates a profit if the volatility of an asset exceeds a certain threshold.

Both the option and the strategy rely on volatility in the future to succeed. The biggest drawback of the option is that the price won't move, and you won't break even on the premium you paid for the option, and the second biggest drawback is that you may not qualify for an option trading account. Meanwhile, a lot of the problems described in answers of that question, such as day-trading regulations, comissions, risk of the stock going down and never coming up, and so on are avoided.

So is it true that if you want to bet on fluctuations, you are always better off with an option like straddle? Is there any reason to actually buy and sell shares instead of just buying the option other than:

• The premium on the option is too much
• You don't have an option trading account

Answer 1

Buying options (calls, puts or strategies where you are long underlying) is buying insurance for some period of time. Therefore you have to recognize that as well as getting the risk you want you will always be paying something for that insurance plus it expires at some point and then all bets are off.

So there's a Time window and paying the premium. You need to decide if that insurance is worth it to you given your risk appetite.

This is why sell side and pro but side are usually sellers of options... Like Warren buffet, they know selling insurance is a long term strategy for big gains as long as you can manage the losses.

Answer 2

In order for you to buy an option at a reasonable price, you have to trade against someone who is willing to sell you the option.

Many option market makers are in fact doing the opposite: selling the option at a profit over their true likelihood of expiring in-the-money, and buying and selling the underlying stock to maintain a hedge in the risk of the option they sold you.

They too could hedge using options, but buying stock (at least on the terms they have with their brokers or exchanges) is 'cheaper'.

You need to run the numbers. If options will be less expensive and more profitable in the long run, use them. If not, then use stock. I would expect that stock would be the cheaper hedge, but everyone's costs profiles are different.