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No one says that you have to hold that put to expiration and lose the full
$2000. There are many strategies that will generate cash flow as well as
offer protection for the position utilizing options and the future. The
initial cash outlay has nothing to do with potential profit from the postion
or the eventual cost of the protection. It is difficult for many to
understand that with options, in many cases, you "can have your cake and eat
it to". Good luck. Ira
Earl Adamy wrote:
> I'll give an example. I'm evaluating a possible long term bottom in JY
> for which I would want to be long the Sep contract. Weekly setup gives
> me a 321 spread between entry and stop at weekly PL of 9300 for risk of
> $4012/contract. Hourly setup gives me a 161 spread between entry and
> stop at hourly PL of 9465 for risk of $2012/contract. A lay-up
> consisting of a long Sep JY and long Sep 980 put (in money) costed out
> at 160 net or $2000/contract risk. In return for the cost of the smaller
> stop up front and a giveup of a couple of hundred points in potential
> profit, one can establish a long term trade with profit potential
> measured in tens of thousands. Further, a profitable move in the combo
> will permit one to pyramid the initial position using profit from the
> initial trade.
>
> Earl
>
> ----- Original Message -----
> From: "Earl Adamy" <eadamy@xxxxxxxxxx>
> To: <realtraders@xxxxxxxxxxxxxxx>
> Sent: Tuesday, May 30, 2000 10:23 AM
> Subject: [RT] Re: Sector Rotation
>
> > There are times when using a long future and in money put or short
> > future and in money call allows one to establish an initial position
> in
> > a trend change without risk of getting stopped out or limit move
> against
> > the position. A well chosen combo costs little more than the risk if
> > filled at a relatively tight stop loss and reduces the risk if filled
> at
> > a relatively wide stop. The only disadvantage is that one pays the
> price
> > of the stop up front and gives up a small portion of profit up/down to
> > the strike. In my experience, it's been well worth the cost.
> >
> > Earl
> >
> > ----- Original Message -----
> > From: "Gwenael Gautier" <ggautier@xxxxxxxxxxx>
> > To: <realtraders@xxxxxxxxxxxxxxx>
> > Sent: Monday, May 29, 2000 9:31 AM
> > Subject: [RT] Re: Sector Rotation
> >
> >
> > > Thanks Ira. I understand all that, I am a professional in
> derivatives,
> > and have worked
> > > in about all possible positions in this business for many years now,
> > and even if not for
> > > as long as you yet, I also grew up with stocks and options in
> > particular from kid on.
> > >
> > > Options do not create value anyhow, they just transfer your risk, at
> a
> > cost. For
> > > privates this comes at a (very) high transaction cost, which you
> might
> > just as well
> > > reduce by simply using stops on the underlying... (as in your
> example
> > below: why bother
> > > doing something complicated when you can do much more simple and
> > cheaper? In essence you
> > > sell short and put in a stop!)
> >
> >
> >
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