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Dennis,
you are touching on a number of points here.
My first question would be, why would you *want* to trade index futures in
the first place? To make money, go where the liquidity is. It is true that
most options on futures-based indices are not as liquid as, say, the OEX. If
your purpose is speculation as opposed to hedging a portfolio of stocks, why
be married to the S&P?
That said, I believe if you were to try trading S&P options medium to long
term, you would be quite pleasantly surprised. Even though they aren't the
most liquid instrument in the world, you will usually be getting quite a
decent fill. Just don't buy or sell at the market; instead, have a floor
broker give you a current B/A quote, then place a limit order somewhere
in-between, and unless the market goes wild you will usually be filled at
your price.
Of course, S&P options are not for day trading. For that, you might consider
the OEX.
Deeply-in-the-money options are not as problematic as you might think. While
it is true that they are only infrequently traded, this doesn't mean that
there wouldn't be a floor broker or market maker who would be willing to
take the other side. It's again a question of differentiating between
trading volume and market depth. The guy may charge you a wider b/a spread
for that privilege, but remember you have made a lot of profit on that
option already if, indeed, it is that deeply ITM.
Also, let us not forget that a deeply ITM option will have very little time
value left. Most of its premium consists of intrinsic value, as Colin
correctly pointed out. So a large part of that option's premium value is for
real - it's not just in the eye of the beholder! Therefore, you are bound to
find a taker, and if your option is American style (which the OEX options
are, and the S&P options are not), you can even exercise that option
yourself at any time, thus retrieving the main part of the inherent premium.
What do you do when the market goes berserk and you can't get any quote at
all from the floor? This can and does happen, even in very liquid option
markets such as the T-Bond options. So what do you do then? That's the
beauty of being long options. You just lean back and wait for the tumult to
subside. Your account will be protected.
As regards different types of accounts, the fact is that more and more
liquidity goes into instruments that can be traded only from a stock and
stock options account. This includes not only many interesting stocks, but
also the SPY, QQQ, OEX, and many cash-based index option markets. Of these,
QQQ and OEX can definitely be used for direct day trading of options.
Lastly, as a rule it is neither desirable nor advisable to trade the S&P and
hedge those trades with S&P options (I can see some raised eyebrows at this
statement). And it is even less advisable to trade S&P options and hedge
them via the individual stocks underlying that index. I just saw Bob Fulk's
post come up on my screen, and if you don't mind I'll address this point in
my reply to Bob, hopefully later today.
Best,
Michael Suesserott
> -----Ursprungliche Nachricht-----
> Von: DH [mailto:catapult@xxxxxxxxxxxxxxxxxx]
> Gesendet: Tuesday, July 03, 2001 20:57
> An: Omega List
> Betreff: Re: AW: Options - was:Globex2 in home
>
>
> 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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