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So say I wanted to make money off of a simple RSI-MACD algorithm on SPY (ofc this may not necessarily make money, but let's say it does). I'd like to leverage my returns using call and put options, but I'm not sure what kind of option would be best.

First I'd imagine I'd want to use weekly options that expire very soon since I'll only be holding a contract for max 60-90 minutes where theta decay should be manageable.

Though after that I'm really not sure about what kind of strike price would be best. Normally you'd want a deep ITM option so that you have a high delta and low theta, but I'm not so sure. One benefit of options that I'd like to maintain is the high leverage with low downside risk (in cases where trades go very wrong), and ITM options are expensive. Also, looking at options chains myself, I often notice that OTM options are usually more price sensitive % wise, all the while being much cheaper (and thus less downside risk).

Then there's also a case for Near-the-Money options because of the options smile, thus, in the case of the underlying moving either up or down, IV will increase, keeping my premiums (relatively) high. Though Near-the-Money options also experience more theta decay.

So what's the best bet? Or is there no best bet?

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    $\begingroup$ what underlyings are you looking at? single stock, index/etf? If you are looking at single stock, options are generally not very liquid except for only a few big names like AAPL,MSFT etc. With such a short holding period I really doubt if it's possible to have profits. The bid-ask spread could you kill you or you'll have to hold the positions much longer than you are willing to. $\endgroup$
    – CABLE
    Aug 1, 2020 at 15:51
  • $\begingroup$ @CABLE Ah right, liquidity is a huge issue, but yes I imagine to use only very liquid option chains like SPY, QQQ, APPL, MSFT etc. $\endgroup$
    – mhu
    Aug 1, 2020 at 15:55

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You may be looking for synthetic longs/shorts which would be buying/selling an ATM call and selling/buying an ATM put. This will give you leverage while nearly replicating the underlying.

I would caution that if you're only looking to hold for a couple hours, you will need to seriously consider the transaction costs.

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  • $\begingroup$ For SPY the spread is usually only a few cents if not 1 cent (correct me if i'm wrong) for the weeklies, are there other transaction costs I need to consider? $\endgroup$
    – mhu
    Aug 3, 2020 at 20:58
  • $\begingroup$ I'm not familiar with the very liquid option chains so in that case, you're fine! $\endgroup$
    – Quantoisseur
    Aug 3, 2020 at 21:25

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