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Robert,
in a working market you can *always* sell an ITM option, because its
intrinsic value is not subjective, but objective and measurable. That's also
what should be done, even if it does cost some slippage.
Hedging an option by selling a futures contract and waiting for that option
to expire is an interesting but expensive strategy; it is tantamount to
throwing the whole time value part of the premium out of the window. Unless
that option is quite close to expiration already (in which case you could
simply exercise it), it would mean giving up a considerably greater part of
the premium than any slippage one would be likely to incur.
Best,
Michael Suesserott
> -----Ursprungliche Nachricht-----
> Von: Robert Hodge [mailto:r-hodge@xxxxxxxxxxxxxxx]
> Gesendet: Tuesday, July 03, 2001 22:14
> An: DH; Omega List
> Betreff: RE: AW: Options - was:Globex2 in home
>
>
> If your future-option moves to become very-in-the-money and you
> are worried
> about slippage then you may as well just hedge your option with the future
> (I think) and wait for expiry. Maybe Michael/someone can confirm
> this makes
> sense.
>
> eg long 100 strike call option when market is say 200 would make the delta
> say very close to 100% (effectively a future). Sell the appropriate number
> of futures here. You will have effectively taken the profit at that price.
> Should the market then retrace back to 100 before expiry then you
> will have
> a worthless call option but still have the profit on the future hedge.
>
> Regards,
>
> Robert
>
> -----Original Message-----
> From: DH [mailto:catapult@xxxxxxxxxxxxxxxxxx]
> Sent: 03 July 2001 19:57
> To: Omega List
> Subject: 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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