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First and foremost if I were going to trade a position with a stop, in a very
volatile instrument, I simply wouldn't. I would have bought the option in the
first place. If I were going to buy a long future with the expectation that my
stop might be violated and therefore I was going to buy a put to protect why
didn't I just buy the call in the first place. The call is the equivalent of the
long plus the put. Look at how much you would be willing to risk with the stop
and see if it was just cheaper to buy the option in the first place.
Also if you were going to hedge with an option(using a put to hedge a long or
using a call to hedge a short)you really do not need to delta hedge....the gamma
of the option does it and that is why the option has time erosion. Gamma the rate
of change of delta is part of the cost of time erosion or theta.
There seems to be a general avoidance of options, in my perception, by many of the
RTers for a number of reasons. Ask your self how many time have you been correct
in the long run, but stopped out prior....if that happens a lot then you would be
far wealthier if you had traded options. Any payoff you can create in the futures
market can be created in the options market. What you can't create using purely
futures is any payoff other than a straight line....with options you can create
any payoff you want. You can create a long future(Call-Put) a short
future(Put-Call) and about three dozen other different payoffs.
OK enough time on the soapbox. Anyone looking to really create investment choices
ought to really get a good options education. Even if you never ever traded them
it would be nice to know what your choices are.
swp wrote:
> So what kind of order do all you folks use? IF it is a limit order, away
> from the market, you probably will get filled at the wide bid/ask spread
> anyway. The only way to really avoid that, I've often found, is to get a
> bid/ask when the market is quiet and then try getting a price towards
> the middle of that range on an immediate or FOK (fill or kill) basis.
>
> The great prob I've found with using options for stops is just as what
> everybody is alluding to: The spreads are much wider than the futures.
> And remember, for a proper hedge, it needs to be delta weighted, so you
> need to buy/sell more options contracts than futures, making your
> brokerage higher too.
>
> Steve Poser
> --
> Steven W. Poser, President
> Poser Global Market Strategies Inc.
> http://www.poserglobal.com
>
> BrentinUtahsDixie wrote:
> >
> > Yikes! I'm with the DR about using MOC orders you're going to get a fill at
> > "their" greatest pleasure. Whether that is better or worse than an ATM order
> > during the session I'm not sure but either way you're playing into "their"
> > hands. I've heard tales of actual jubilance as an ATM option order comes
> > into the pit and is sort of tossed around like a basketball would be in a
> > ball game. The only time I've used the order is when I'm trying to rescue
> > some of the value of an expiring option or in a fast market.
> >
> > Brent
> > -----Original Message-----
> > From: Mervin Yeung <tinyeung@xxxxxxxx>
> > To: Real Traders <realtraders@xxxxxxxxxxxx>
> > Date: Monday, June 21, 1999 4:18 PM
> > Subject: OPTN: Market on Close
> >
> > >Hi RTs,
> > >
> > >I am trying to use options to replace stops. I worry about the
> > >liquidity. I know the close is usually the most liquid of the day. I
> > >wonder if I use Market on Close Order to buy calls or puts right at the
> > >close, is it a good way?
> > >
> > >Thanks in advance!
> > >
> > >Mervin
> > >
>
> Email: swp@xxxxxxxxxxxxxxx
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