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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.
Dennis, think of (deep) in the money premiums as having less extrinsic value
and more intrinsic value; i.e., as an option moves further into the money
its delta increases which may be thought of as synonymous with greater
liquidity. At the money strikes may trade more frequently, but not
detrimentally to the liquidity of deep in the money options.
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.
This concern is easily addressed. It's generally preferable to have one's
assets linked across all accounts. For example, trading bond futures against
(actual) bonds usually implies 2 brokers and 2 accounts, and to endeavor to
maximize efficient use of capital, the assets in both accounts are
collateralized or securitized to one portfolio.
Colin West
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