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Trading Futures with options as protection


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Trading Futures with options as protection

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  #11 (permalink)
Legendary Market Wizard
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zxcv64 View Post
I realise this is an old thread, but I'd like some opinions pls :

As a relative newcomer, I have been buying/selling futures with protection. For example, I recently bough NGJ19 at 2.82 and a long Jan put at 2.70 strike for 0.066

Thats the same as buying a 2.70 call at 0.186.
zxcv64 View Post
My max loss is basically [Future price - long put strike]*multiplier + the cost of the put.

Yes. The same as buying a call.
zxcv64 View Post
Before I scale up, are there risks that I am blind to?

It's simple algebra.

A - B = C
Long Call + Short Put = Long Futures

A = C + B
Long Call = Long Futures + Long Put

C - A = -B
Long Future + Short Call = Short Put

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  #12 (permalink)
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"you should buy put options for the same month as the future."

Yes, I normally try to do this, but sometimes I will buy a shorter dated put against a longer dated future.
The risk being that the underlying does not move enough by the time the long put expires (I got caught out with KCZ18 in Aug like this - as soon as I closed my trade for a loss due to the put expiry, the future went on a big upward move, and I missed out on a large profit).

I plan to always close the future by the time the put expires. My reason for buying a shorter dated put is if I think the underlying is technically oversold and a bounce is due. As shorter dated puts are cheaper, it helps with the %age return figures.

I am also doing the opposite trade - shorting a future and buying a protective call. Did that on ZB recently.

To my surprise feeder cattle is a good candidate for this sort of trading. I have gone in and out numerous times closing the trade within 2-3 days for a good profit.

I have no intention of trading lumber, and orange juice has only one good seasonal that appeals to me.

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  #13 (permalink)
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SMCJB View Post
It's simple algebra.

A - B = C
Long Call + Short Put = Long Futures

A = C + B
Long Call = Long Futures + Long Put

C - A = -B
Long Future + Short Call = Short Put

Thanks @SMCJB.

I'm totally comfortable with the algebra, and am aware that buying a future and a long put is technically the same as buying a long call. However, there are subtle differences between the two strategies. A couple of which are :

Liquidity - I find it easier to trade a future than an option and at a better fill. Options have wider spreads, and closing a position can sometimes be less price effective than with a future. Last week, I closed HEJ19 for 67.250 when the price momentarily hit that level - I immediately tried to close my put and struggled, even at a price close to the bid. This is due to lower volumes in the options and a smaller market. I feel that simply buying a long call in this trade, rather than a Future + Put, may have given me a similar problem in closing the call.

Repeatability : if the future rises and I close it, and the long put is worth very little, I will often just leave it, rather than selling it. At some point in the days/weeks ahead, if the future falls back close to my original entry price, I will buy it again, and I already have the long put from the first trade. So, in effect I am using the same long put twice. In fact, I reused a put 3 times with feeder cattle recently, which greatly enhanced the returns.

I am going to keep an eye on how the long call vs the Future + Put plays out and then trade accordingly.

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  #14 (permalink)
Market Wizard
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zxcv64 View Post
"you should buy put options for the same month as the future."

Yes, I normally try to do this, but sometimes I will buy a shorter dated put against a longer dated future.
The risk being that the underlying does not move enough by the time the long put expires (I got caught out with KCZ18 in Aug like this - as soon as I closed my trade for a loss due to the put expiry, the future went on a big upward move, and I missed out on a large profit).

I plan to always close the future by the time the put expires. My reason for buying a shorter dated put is if I think the underlying is technically oversold and a bounce is due. As shorter dated puts are cheaper, it helps with the %age return figures.

I am also doing the opposite trade - shorting a future and buying a protective call. Did that on ZB recently.

To my surprise feeder cattle is a good candidate for this sort of trading. I have gone in and out numerous times closing the trade within 2-3 days for a good profit.

I have no intention of trading lumber, and orange juice has only one good seasonal that appeals to me.

If you buy the puts for other expiry months than the futures you have to take care of the following:

For a large number of futures the price movements for the different expiry months move more or less parallel to each other, eg. the indices or the metals.

For some futures the price movements for the different expiry months move more or less independently from each other, expecially in the meat markets, but also for Natural Gas in winter (F, G, H contracts). I would avoid trading different months for these futures / options.

I usually buy the puts for the same month as the future, and sell it after being able to place a safe profitable stop for the future.

Best regards, Myrrdin

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  #15 (permalink)
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zxcv64 View Post
Yes, I normally try to do this, but sometimes I will buy a shorter dated put against a longer dated future.

Seeing your NG-Note in another post I'd be careful as this can deadly having another month with the option than the future. The seasonal spread can get huge between months in winter and so the spread between options with same strike of subsequent months also. So for NG in winter it could be more interesting doing future spreads waiting in early winter for the widening of the spread.

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  #16 (permalink)
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PK 1 View Post
Seeing your NG-Note in another post I'd be careful as this can deadly having another month with the option than the future. The seasonal spread can get huge between months in winter and so the spread between options with same strike of subsequent months also. So for NG in winter it could be more interesting doing future spreads waiting in early winter for the widening of the spread.

For Natural Gas trades in winter (F, G, H contracts) I prefer buying options. In my opinion, spreads can make huge moves overnight / over the weekend.

My recommendation for beginners: Avoid trading Natural Gas in winter.

Best regards, Myrrdin

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  #17 (permalink)
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myrrdin View Post
For Natural Gas trades in winter (F, G, H contracts) I prefer buying options. In my opinion, spreads can make huge moves overnight / over the weekend.

my point was just as simple as sticking to the same month as the underlying when playing NG-Options in Winter. That means Z - H and careful already regarding X because the winter-games of NG-Trader can start earlier. Unfortunately I missed spreading Z-F but no prob as H starts walking delayed thereafter. The sunday gaps can be extreme and could kickin tons of margin caught on the wrong side!

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  #18 (permalink)
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myrrdin View Post
My recommendation for beginners: Avoid trading Natural Gas in winter.

I'd second that!

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