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Michael (who knows a helluva lot more about options than I do) wrote:
> The message I tried to convey with my little example was
> that the price of the underlying has to move quite a bit for the liquidity
> of an at-the-money option to dry up in any noticeable way (of course this is
> true only for reasonably liquid markets, not for cotton or lumber). Option
> trading when done right will give much better protection than the use of
> stops; therefore, a certain amount of slippage is perceived by the option
> trader to be a comparatively cheap price to pay for this added safety.
I wonder if that's really true for index futures traders? Options on
futures are notoriously illiquid. While you might be able to purchase
your "insurance policy" relatively easily, you might have a very hard
time cashing it in if you actually needed it and your options had moved
deep in the money. All the liquidity would be at the new ATM strike
after the big move.
You could use options on the underlying, for the better liquidity, but
that would mean using two separate accounts for futures and stock
options. A big profit in your stock account wouldn't stop a margin call
in your futures account. Settling a trade in your stock account and
transferring the money to your futures account would likely take more
time than your futures broker would be willing to give you.
--
Dennis
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