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I have cut my teeth on equity options trading, but am looking to get more serious on futures and start moving towards trading as a vocation.
I am very intrigued by futures, but have often caved under the heat that comes with the massive amount of leverage that you get. Some of my trade ideas would have been successful had I been able to sit through the big drawdowns that take place on entry.
I know futures options contracts vary in size from product to product. My question is this, is there a strategy that involves entering a futures position with a option hedge. For example 1 long ES contract with one long ES put (choose your expiration) then liquidating the option when you get the move that you are expecting. or vice versa with short contract long call.
does the options contract size effectively hedge the cash you put up for the contract?
hopefully this question/discussion makes sense, I don't really know where you would learn about something like this other than this forum. thanks for any replies! Cheers!
Also how would you attempt to execute an order like this from ninja trader? I have a rithmic data feed and also TD ameritrade linked with the NT8 perpetual multi broker license.
Trading: Equities, index options and futures/futures options
Posts: 190 since Apr 2010
Thanks Given: 66
Thanks Received: 198
Being long one ES contract and one put option is the same as being long a call of the same strike price. In fact that is considered being long a synthetic call. Depending on what strike price you choose, the put will make up for some of the loss if the market drops but not all except under very unusual circumstances. You might as well save the commissions and execution issues and just buy the call. Your loss will be limited to the price paid for the option and if the market moves in your favor the Delta of the call will rise giving you increasing profit if the market keeps going your way. You will never make as much as just being long a long futures contract but being long the put would have cut your profit as well since its price will drop as the ES rises even if you later sold it.
I've tried a few different versions of 'hedging' and arrived at the conclusion that there's not much benefit but there is the downside of paying twice as much in commissions.
I also found that I can't expect any real profit until I remove one side of the hedge. Isn't that the same thing as simply opening a new long or short?
I further found that the market moves against my recently unhedged position at the same rate as just opening a new position. The only difference is I paid twice as much in commissions. Or more than twice because for me, options have a higher commission than futures.
Now, it's certainly possible I'm doing something wrong or I don't understand some important details but I had to conclude there's no point of doing this.
Hopefully following this thread, some light will be shed on advantages I'm not aware of. Looking forward to see how it unfolds.
PM with any questions about Cannon Trading (800) 454-9572 (310) 859-9572. Trading commodity futures, forex and options involves substantial risk of loss. The recommendations contained in this post are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.
The topic you are addressing is very broad in its subject matter. There are countless possibilities to hedge futures with options and vice versa. This in any way, however.
In order not to overwhelm you with information, as I was educated in dept exactly on this thematic, I will briefly go into the mentioned strategies which you have already mentioned. The shown are older screen shots of trades, but the risk profiles are 100% still exactly the same structure today.
"Synthetic Put"
and "Synthetic Call":
I do not want you to understand in detail what is shown there. It is enough if you understand that if you trade at the same time with an option and the futures, you have a residual risk.
On the pictures you see a so called 0 or zero line. Everything below it you can see as your current risk when entering the market with these two derivatives at the same time.
This risk profile changes permanently, depending on how the market is moving and of other factors.
No matter which market you are trading, these risk profiles are, of course with different values, always built up in the same way. You must understand this if you are interested in this topic that you are addressing here.
Second point:
Since you are talking about options, I assume that you have some understanding of how options work. If you know the terms like: OTM, ATM and ITM, as well as Delta, Theta, Implied Volatility, Intrinsic value or Gamma are foreign to you, then please read up on what is involved.
Depending on which option(s) you choose from the whole spectrum that the individual markets provide at any given moment, you can change your risk profile. Following is a case where we took two options and the Future to start the trade. This variant is called: "Synthetic long put straddle".
The above are only three examples of how to enter hedges with futures and options. To keep the whole thing simple, I have not gone into further criteria such as the standard vola "SV" in the futures and all the further steps in the individual strategies.
There is then among other things the structure of these strategies to mention and how I define my next steps in the market. Also there you can adjust your risk profile, depending on the market situation and change at any time. Also the choice of option/s is extremely important for the risk profiles.
As I said: Depending on how you want to understand the topic and the individual sub-topics in detail, depending on the effort of learning changes. Hope it has made a little fun to see the shown and at the end still a risk profile how it should look like after successful planning for further steps:
If someone now says: Wow, that's it and already has good knowledge in the matter and wants to educate himself further, I can only recommend the following book in such a case:
Option Trading - The hidden reality. Charles M.Cottle (ISBN 1-55738-907-1 / @ 1996 / https://www.riskdoctor.com/
Your statement about options is a bit too short and especially too simplistic. However, understanding this requires a certain knowledge about this derivative in advance.
Since this thread is primarily about hedges with futures and options, I do not want to be intrusive here to talk about and the possibilities of pure options trading.
In short, there is a whole world of hedge strategies just with pure options. If you are interested, I can recommend the following book:
The Bible of Options Strategies. Guy Cohen. (ISBN 13: 978-0-13-171066-5)
To give a little inside what I talk about, following some screenshots from a trade we did in 2007. It is called in general" Back Spread". If you have any idea about options, you will understand the two steps token to have the final start risk analyzing picture for further option hedges. Like in above screenshots: The way computer program do this risk analyses are still done today more or less the same way.
Will not talk further about this topic here in this thread.
Hi Everyone thanks for your responses. I am aware of the synthetics and spreads you can trade to adjust your risk profile.
My question more specifically would be around using a "collar" strategy equivalent in futures. Does purchasing one put, and going long one future contract of ES neutralize the directionality based on the options contract size which is a 5x multiplier.
I get the innefficiency of this strategy in reference to commissions and theta although I have a specific use case in mind for it.
A mean reverting strategy on a medium to longer time frame, 4 hour candles or daily candles for example, using something like a Bollinger band or RSI2 type strategy.
This type of strategy has a high win rate, but the average adverse excursion within the trade can be fairly extreme often much larger than the average profit. My thinking is an entry of a futures contract with a corresponding option hedge either long put or long call for short futures, would help one wait out the trade until it moves in the expected direction. Of course you would need to create a system for deciding when to liquidate the hedge, but to me that seems like an easier problem than staring at an open loss of thousands of dollars and having to re convince myself that my strategy is valid.
