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Having been previously burned by stop running in the sugar pit, I
learned my lesson this time. A bit of investigating turned up the
information that there is what is referred to as a "lay-up" which is
similar in concept to a spread but employs a futures contract and an
option. This combo is ordered for a net price and insures that both the
future and the hedge (put or call) are executed simultaneously.
In this case I feel reasonably sure that either a bottom is in or a
significant correction (rally) is underway. I put in a lay-up order to
purchase the future (closed 22Mar at 525) plus a May 550 put (closed
22Mar at 34) for 560 (10 cents premium to strike or 112.00 per contract)
and was filled. Because the put is already deep in the money, I have
dollar for dollar protection on the downside and will give up nearly
dollar for dollar on upside to 550. If sugar rises to the 565 (5 cent
position margin) area and fails, I will sell the future and maintain the
short with the put. If sugar rises toward the 601 (41 cent position
margin) area indicating the beginning of a new trend, I will likely sell
the future, hold the put for the retracement, and sell the put. In the
meantime, I don't have to worry about stop running or limit moves in
the pit.
I have a similar position with different trading tactics on in silver
(another NY pit) using silver future and a 525 put. I believe silver
will either drop significantly (through today's 510 low at 62%
retracement followed by 506) where I will sell the future and trade the
put, or blow out to upside. Based on time measures, I believe the
bullish case has higher probability.
Earl
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