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Earl,
As an FYI, Macmillan's more recent book contains a section on using synthetic
options positions to offset limit down moves in futures contracts. He even
goes so far as to say "if you don't understand this concept, stop trading
futures or learn the concept".
GC
Earl Adamy wrote:
> Although I've read Macmillan's original book on options, I haven't traded
> them in years and when I did I generally wrote covered calls. My experience
> in using options in a case like this is nil. That said, I'll venture a few
> comments. Generally the safe returns are earned by selling premium rather
> than buying premium. Also, premiums are generally highest when directional
> volatility is highest. In this case, where downside volatility is extremely
> high, one could expect to pay dearly in premium for the put while earning
> little in premium for the call. Assuming the initial move is approaching
> support, one could reasonably expect the short volatility premium to
> contract and the long volatility premium to remain flat or expand. Thus from
> an options standpoint, I would want probably seek to sell put premium and
> buy call premium. While this might well be a sound approach as an options
> trade, it would only compound and complicate the problem of the current long
> position - the very reason why I prefer to run simple long and short futures
> trades.
>
> Earl
>
> ----- Original Message -----
> From: RAY RAFFURTY <rrraff@xxxxxxxx>
> To: <realtraders@xxxxxxxxxxxx>; Howard Hopkins <hehohop@xxxxxxxxxxx>
> Cc: Real Traders <realtraders@xxxxxxxxxxxxx>
> Sent: Thursday, August 12, 1999 11:24 AM
> Subject: RT_Re: Limit Down
>
> > Hi Howard,
> >
> > As you may know, you can create a synthetic position with options. To
> > create a synthetic short position, the opposite of your long position, you
> > BUY a put and Sell a call. If you buy the put and sell the call at the
> same
> > strike price, you will have the equivalent of a short future position to
> > offset your long future position. You may lock in a small loss but it
> will
> > be better than days of lock limit down. Call your broker, hopeful he
> will
> > be able to suggest to best options to hedge your longs.
> >
> > Other suggestions, anyone?
> >
> > Good luck and god trading,
> >
> > Ray Raffurty
> >
> > P.S. For your owe protection, please learn option strategies before you
> > continue trading.
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