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Gwenn Ael Gautier wrote:
>
> ALTAF JUMMA wrote:
> >
> > Hi Rtrs,
> > I have the same question. I do not use stops except very selectively mostly
> > in lumber, S&P and Coffee because a stop is another parameter which can
> > degrade the system. I have considered options as a hedge but again worry
> > that option premium will eat up my profit. My mental stop is $ 500. The
> > option may be worthwhile if costing less than $500. However I have not yet
> > come up with a solution.
Any
> > comments on the above or anybody doing something similar.
> > Happy Trading Ashif
Ahshif and all,
Interesting question! :) Options offer advantages over
futures in two ways:
1. They are very flexible and, when implemented properly, can yield
significant market protection or advantage.
2. Purchasing an option often provides strong psychological solace, as
the trader now realizes that his risk is limited to a finite amount.
3. In the current trading environment, almost ALL futures make sharp
Options can be disadvantageous in the following ways:
1. Buying premium might cost you money, or chew up profits.
2. Selling premium when you don't know what you are doing.
3. Options are often much less liquid than futures, which sometimes
makes exiting the system problematic.
As I have recently changed my style from a futures day-trader, to a
swing and mid-term futures/options trader, I am afraid my bias lies a
bit with the advantages.
It's easy to look only at the "profit" side of a trade, when perhaps
we should be examining our risk and potential for profit.
In the trade you wanted to put on Ashif, how about this
If you are Bearish:
Buy Defensive call
Sell Futures
Sell OTM calls to defray cost of option purchase price. (Best if done at
credit.)
Position Costs:
Commission on Options and Futures
Margin with limited futures risk and option write risk probably about
= to margin of holding futures alone.
Profit potential: Unlimited
Risk Potential: limited to cost of commissions and differential
between futures purchase price and purchased call, as long as
market price remains below strike of calls written. (Even less if
calls are written at a credit against the call purchase. A very likely
possibility in Coffee.)
If your market analysis is correct, then profit is massive, and
costs are limited to commissions.
If your analysis is incorrect then:
1. Probability of extremely large loss is less than 1% .
2. Probability of small loss is about 99%
another strategy might be to create a "synthetic" futures by buying
a put and selling a call in accordance with whatever risk paramaters
you want to build.
This sounds complicated, but any reasonable options software could
calculate all of this stuff for you in no time at all.
These strategies are extremely flexible.
Coffee would be OK. Lumber would be tough. The options are very
illiquid.
If I felt strongly about a position in Coffee, I would defend with
a naked call purchase over a stop, in a heart beat. If you are wrong,
you're covered, and if you are right, I don't think you'll mind spending
that initial $800 bucks when you're up $4,000-$8000 dollars . :) If
you're profitable, THEN you could roll out of the call and place a
normal protective stop.
This type of trading can be difficult because you need to understand
options as well as futures.
I'm still an infant at it myself, but I find the possibilites
fascinating.
By the way, if you can trade lumber or Coffee successfully with a
$500 stop, mental or set, PLEASE tell me your secret. :)
Walt Downs
CIS trading
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