In the 1940s the average holding period for stocks was as high as 10 years. This is unheard of today. Now the average is down below one year and many active traders (day traders, swing traders) are looking at being in open positions for a matter of days, not even weeks or months.
With this new "normal" (created in part by access through the Internet, low trading costs, and markets characterized by high volatility), do options play a role?
In fact, they can. Options are flexible, much cheaper than stock, and can be used to manage and reduce risks. For example, a bearish trader may short stock but that is a complex, expensive and high-risk strategy. As an alternative a long put gives the trader control over 100 shares for a much smaller market risk. The typical at-the-money long put with one month to expiration is going to cost about 3% to 5% of the cost for 100 shares of stock. For example, this morning ConocoPhillips (NYSE:COP) was priced at $50.06 right after the open. The September 50 put (35 days to expiration) was at 1.82, or 3.6% of the cost of 100 shares.
Do active traders benefit by using soon-to-expire options to actively trade? Yes. Considering that the typical holding period is extremely short, options expiring in less than one month are very cheap because most of the time value has already disappeared. So options provide leverage and diversification, not to mention much lower risks. Of course, the potential relies on the moneyness of the option. For very short expiration timing, ATM options make much more sense that OTM, and ITM options may not perform well with gains in intrinsic value offset by any remaining time decay.
Many have already figured this out. Take a look at the CBOE stats on option trading. In 1979, when puts were publicly traded for the first time, over 39 million contracts were traded (up from only 1.1 million in calls four years earlier). By 2013, over 4 billion contracts traded, and each year's growth rises to record levels. Clearly, options are going to play an ever larger role in the future.
Michael Thomsett blogs at the CBOE Options Hub and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website
Thomsett also writes extensively on the topic of candlestick charting. You can discover the world of effective chart reading with Profitable Trading Strategies Using Candlestick Charting. This is a comprehensive and complete course on the nature of candlestick charting, offered exclusively by the Global Risk Management Community. By the conclusion of this course, you should be able to locate actionable candlestick signals, better understand what is likely to occur next, and combine candlesticks with other technical signals to forecast price movement. To find out more, go to Using Candlestick Charting
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