Options & Futures/How to trade options profitably
Considering the bid-ask spread of options is so wide (several percentages), with the addition of broker's commission, how can I possibly trade options profitably in the long run? For sure there will be gains and losses, but the losses will be amplified with wide bid-ask spread? Of course if I choose to do limit order, I may miss the boat most of the time considering the options market isn't liquid. And while leverage is there, it doesn't mean every positive trade would end up in double digit.
Hi Choo. The bid/ask spread is a nasty problem that, unfortunately, will limit the amount of stocks you can trade if you want to remain profitable in the long run. One of the best things you can do is to make sure that the underlying trades an average of at least 1,000,000 shares per day and then only trade the options that have an open interest of at least 200 contracts. Even when you filter your choices using these 2 criteria, you still may not find tight enough spreads for the trade to make sense. I usually try to stick with index ETF's, namely SPY (S&P 500), IWM (Russel 2000), DIA (DJIA), and QQQ (Nasdaq). These issues have $.01 price increments on their options and the spreads are amazingly tight (usually just $.01). There are a lot of ETF's that may work for you. I've also found Apple (AAPL) to be just as efficient. Check out Investor's Business Daily. They have their IBD 50 which is the 50 highest rated growth stocks and they are usually pretty liquid.
Hope that helps,