Stocks vs Options

I started running the numbers for stock trades along side of the option trade for the month of June with respect tot he day trading only. I fully expect that playing the stocks can be more lucrative on a straight cashflow basis as opposed to a ROI basis... back to ROR or Return On Risk I suppose.

Three days in and the numbers surprised me a little. While we have only had a few trades this week this is more for a comparison.

Options:

6 trades closed, 4 contracts per trade
$708 profits
Average trade size $2.66
Maximum capital in use at any given time $5,000
ROI and ROR are 14%

Stocks

trades closed, 100 shares per trade (200 shares per trade)
$688 profits ($1436 profits)
Average trade size $126.30 ($252.60)
Maximum capital in use at any given time $47390 ($94,780)
ROI = 1.45%, ROR uncalculated yet but assume 10% at risk it would be 14.5%...same for 200 shares)

Now, that is considering that the capital used is all cash. Seeing as there is 3 x margin the numbers change a bit as I only put up 1/3 of the totals but keep (or lose) the full P/L

ROI with margin used = 4.4%, ROR with 10% of the trade at risk is still 14.5% BUT if I lost 10% of the trades I would lose close to 30% of my cash thus reducing by 30% my buying power for the next day.

This one factor makes using margin not work it but does point out that trading stocks is better for the bottom line than trading options once the cash levels are high enough that the trades can be considered as a cash deal rather than a margin deal.

I can lower the risk by keeping tighter stops than 10%, in fact, in daytrading that is a very loose stop as in the largest trade, AAPL above $260 per share, I would have been using $1 stops at the largest which is really only an overall loss of 0.3%, not 10%.

In that light let's assume that a 2% stop is used overall. This puts the loss allowance down to a much more manageable 6% of the account assuming that all trades move against me and stop out... which none did yet.

The other advantage is that often John will call out a trade and the price will run away so we may either not get in the option trade OR may pay a higher price to get in. In a stock that is as liquid as the ones that we trade options on market orders are the norm as the spreads are very tight, usually no more than 5 cents. This lets me get into trades that run away from the group and close for a profit as soon as John decides that we are no longer watching it... or just set a VTSO or stop at that level to take advantage of a run.

There were two such trades today. One that I missed and would have produced a small profit but had I been into the stock it was a $2.50 move... $250 on 100 shares.

The other was a second opportunity as the trade was followed even after most of got out. It was an AAPL trade. The first move I was in for but sold too low and only saw 30 cents per contract, but still a profit. Others stayed in as the price bumped up then turned south once again to gain an additional 15 cents per contract. Had I been playing the stock I still would have sold on the first signal but I would bought back in on the pullback as there was another move expected. I tried to re-enter the option but missed it.

Total stock profits would have been between $2 and $3 per share which is about double the option trade based on 100 shares vs 400 contracts.

I hope by the end of June to be able to have a good idea of where I need to be in order to be able to trade solely stocks.

Having said that, the AAPL trade was a put or short stock play, as most are right now. I will have to split things up depending upon the market as I can buy puts and calls in my TFSA and buy stocks. I would have to short sell in my margin account so I can just play the puts instead of shorting in the TFSA and buy stocks long instead of calls. Either that or figure that the profits are large enough compared to options in order to make it worth while doing all my daytrading in the margin and just switching to the momentum options in the TFSA as that will always be options.

Always more food for thought and always requiring more capital to be able to do exactly what I want...it will come though.

Jeff.