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Richard wrote:
>
> Another way is to purchase an option.
>
> Now I know there was discussion on this forum a while back about using that
> strategy instead of a stop. Now I don't think for a minute that a standard
> strategy of using stops instead of options when you initally enter a trade
> would result in overall profit, but what about purchasing one when your
> trade reaches its profit goal? That way you could stay in the trade and
> control risk.
>
>
Maybe instead, selling an option a little ways below than where your
(short) futures is currently at? You would still need a stop in the
futures and the problem of where to put it would remain, except that you
could feel better about a wider stop since you collected some premium.
Of course, you've added another question, where do you implement this
strategy, i.e., after how much of a move. If you can sell one that is
beyond some technical "barrier" or fundamental prediction, that would
make sense.
If the futures continued in the trade direction, you would profit until
the strike was hit and then you would have sacrificed further profit
(except you'd have the premium also). But if futures retraced to your
stop or stayed level, you've gotten more profit than you would have
without the option sale.
This might make a lot of sense when volatility has expanded such that
you are no longer comfortable risking the profits you have, with logical
stops that are now further away. One idea would just be to liquidate.
Another might be this idea of holding it with the far stop but selling
an option to make up for that.
As a small account holder I would want to buy back the put as soon as
the futures was stopped out. The one time this would be a probleme is,
if futures made a quick spike up stopping you out, and then retraced
back below the point where you sold the put, before you had a chance to
liquidate that as well.
Conrad Bowers
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