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Options are an ideal medium to play intra-day, of all time-frames,
because it cushions the intra-day volatility and also as an
alternative vehicle to using stops.
I use options too, but use it only in combination with the underlying
instrument (futures or stocks or forex rates). I consider options
instead of a stop loss for Intermediate term signals(In the money
options) and Long-term signals(Out of money options). The equation is
LP+LF(S)=LC; LC+SF(S)=LP; where LP - Long (L) Put (P); LF(S) - Long
(L) Futures (F) or Stocks (S); LC - Long (L) Call (C); SF(S) - Short
(S) Futures (F) or Stocks (S).
The advantage of dealing with this way of combining calls and puts
with the undelying instrument you are trading is that we can pick
cheap calls and puts. Usually when the underlying instrument is
rapidly rising the calls are expensive and when it is rapidly falling,
the puts are expensive. This equation allows you to buy the cheaper
of the call or put and combine them with the underlying insturment, so
that if you have ridden a rally, profiting from a simple long call,
you can switch to a long put position on indications of a turnaround
by simply shorting the underlying instrument. The combined
call-underlying instrument position will perform exactly as if it were
a long put. Similarly for riding a sell-off, but just the reverse.
There are 6 possible combinations:
LC + SP = LF(S)
SC + LP = SF(S)
LP + LF(S) = LC
SP + SF(S) = SC
LC + SF(S) = LP
SC + LF(S) = SP
The bottom line is: Call (C) - Put (P) = Future (Stock or Forex rate)
- Strike price
The strike doesn't vary, so any change in the underlying instruments
(stocks or futures or forex rates) price must cause a
dollar-for-dollar change in the value of the net options position.
Because the options stike has no effect on the changing value of your
position as the underlying instrument (puppies, stocks, bonds, futures
etc.,) changes price, it is normally left out of the equation. But
the strike of the call still must be the same as that of the put. I
use OptionStar for evaluating the options, as to whether it is cheap
or expensive, but in general Options are more riskier than dealing
with just the underlying instrument because of the time element
involved, but combining them with the underlying instrument makes them
incredibly attractive. Futures also has a time-element, but you can
roll-over to another month before the Last Notice Day.
rgds, Pal
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