Quote:
Originally Posted by rickroll
grim, the issue is you don't often contribute
there have been times you've given me some solid advice, and i appreciate that
however, when TS posts about options being good leverage tools for x, y, & z reasons, you then predictably counter it but unlike him you don't say why
...
I responded to rick in PM:
First, regarding the underlying, I don't like CL/USO b/c of major contango. You are paying massive premium over spot just for that, which is why I said XLE is better. XLE also pays a nice dividend, assuming it doesn't get cut. And this is only if you have to trade oil. Frankly, crude and S&P will share some correlation here, so you might as well auto-diversify yourself into SPY. You shouldn't be worried about outperforming this or that, just make some money first.
Next, if you check OVX (oil vol index), oil volatility is highly elevated. Higher than 2008 in fact. So you're paying two massive premiums upfront. Nor am I fan of buying options in general. Real traders, the ones that actually trade markets and not just talk about them, have humility, and know they cannot predict every turn of the market. With options, you have to be right about both the direction and timing of the market, all while dodging vol crush. So when Tooth says "options are just leverage", it's some pretty dangerous nonsense he's spreading.
As for specifics, you were paying 32% premium on that option. Now sure, if oil rallies very soon, you'll be able to close the position for a gain regardless what the premium is. But is it EV+? What if crude goes sideways, or forbid, drops? Each day you're losing money to theta. Think of it as your underlying breakeven price going up each and every day. Might as well buy the underlying than pay 32%. In fact, selling the option cash-secured is probably better play.
If you want leverage, you can trade CL or ES. And yes, you can do interesting things with options which you can't do with just the underlying, e.g. selling naked cash-secured options or simple option strategies, but saying that it's "just leverage" is very wrong.