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RAY RAFFURTY wrote:
>
> 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?
It's worth noting that a synthetic exit, implemented after a price
shock, will *not* insulate you from the loss equal to where the mkt
would have jumped in the absence of limits. If the mkt priced Dec corn
at 200 after the report the mkt. would be limit down several days. The
options (assuming they are trading and not at a limit themselves) *would
price in 200 immmediately*.
The scenario that a synthetic exit might help in is if the mkt.
re-evaluates and decides Dec. ought to be at 180, and this increased
bearish sentiment occurred while the mkt was still "catching up" by
limit down moves. In this case the synthetic would have allowed you an
exit at 200 whereas you wouldn't have that opportunity to exit in the
futures.
Note that on some markets the options stop trading if the underlying is
locked limit.
It seems that the only protection is being in an option position prior
to the price shock, with the accompanying expenses, or simply trading
small enough that a price shock won't wipe you out.
I'm no options expert but I believe the above is correct.
Conrad Bowers
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