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Buying both OTM call and put options to protect from unexpected wipeout
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Buying both OTM call and put options to protect from unexpected wipeout

  #1 (permalink)
Trading Apprentice
Yakima WA
 
Trading Experience: Beginner
Platform: Tradovate, Tradingview
Favorite Futures: Crude CL
 
Posts: 14 since Mar 2019
Thanks: 35 given, 3 received

Buying both OTM call and put options to protect from unexpected wipeout

So here's the thing, I want to trade futures because of the leverage, but at the same time I am terrified of the leverage. A personal friend of my father lost his house and everything he owned because his futures trade went unexpectedly in the wrong direction. I told my father about my interest in trading futures and he is strongly opposed to it and told me "there is unlimited loss potential and stay as far away from them as you can. You never know if your stop loss won't get filled and you get suck with major losses like if your stop doesnt fill in a limit-up or limit-down type of scenario.

So my question to you who do trade futures for a living, is what do you do to protect yourself from this risk? I was thinking that the unlimited loss potential can be limited by buying out of the money calls and puts. Is this the best strategy? Can anyone give me an example of how i can "safely" trade futures?

Is my dad correct? Or is buying options a good way to cover yourself and get around this risk?

For example the CL contract. Let's say it is $60 per barrel and you have 4 contracts and all of the sudden the market slams $10 down to $50 nd your stop loss doesn't get filled. You have just lost $40,000. Is there a way to effectively mitigate this risk to say a max loss of $10,000 in this situation with options?

I appreciate any insight you have to share.

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  #2 (permalink)
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  #3 (permalink)
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Use options


Your dad is right, and options are the most reliable way to protect yourself. Stops are not guaranteed to be filled at or even near your stop price, and if the market limits up/down, or there's a nuclear attack, or who knows what else, you could be toast. Most active intra-day retail traders usually don't worry about this since they feel comfortable with the risk, believing they can quickly get out when things start to go bad because they are watching the market all of the time. But sometimes the market doesn't respond to your actions, and you're stuck with an account-killing position. Most institutional traders have some sort of hedging strategies in place, but sometimes not enough to prevent bankruptcy.

In stocks/ETFs I've seen a short stock position in PCG halt trading, then re-open 2x higher than my entry price...in a few minutes, or a long position in SVXY lose 80-90% of its value in less than 15 minutes, so these sort of moves are real and need to be mitigated with small position sizing and some sort of "black swan" insurance. Protection costs money, but you can pay for all of most of it using option collars, only if you're ok limiting your gains when a black swan event goes in your favor...


Last edited by shodson; March 5th, 2019 at 04:58 PM.
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  #4 (permalink)
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shodson View Post
Protection costs money, but you can pay for all of most of it using option collars, only if you're ok limiting your gains when a black swan event goes in your favor...

Yes, that is what I mean.
I would rather pay $20 a day (or whatever the option cost?) to have peace of mind and limit my gain or loss per day to $5000 a day than save $20 a day and be at risk of a coin flip on gaining or losing $50,000.

I want to play the game by my own rules.

So you say collars are the best way to do this? Thanks for the info. An example would be great if you can. Trying to get an idea how much it would cost to do this effectively.

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  #5 (permalink)
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Follow the link in my post, there is an example there

https://www.investopedia.com/terms/c/collar.asp



ClearTrades View Post
Yes, that is what I mean.
I would rather pay $20 a day (or whatever the option cost?) to have peace of mind and limit my gain or loss per day to $5000 a day than save $20 a day and be at risk of a coin flip on gaining or losing $50,000.

I want to play the game by my own rules.

So you say collars are the best way to do this? Thanks for the info. An example would be great if you can. Trying to get an idea how much it would cost to do this effectively.


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  #6 (permalink)
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shodson View Post
Follow the link in my post, there is an example there

https://www.investopedia.com/terms/c/collar.asp

I don't think a collar is quite right. i think what I am envisioning and describing is the "Long Strangle" option strategy. Curious if anyone has experience using this to mitigate wipeout risk.

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  #7 (permalink)
Market Wizard
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ClearTrades View Post
I don't think a collar is quite right. i think what I am envisioning and describing is the "Long Strangle" option strategy. Curious if anyone has experience using this to mitigate wipeout risk.

It looks like your knowledge about futures and options trading is limited. Thus, I suggest reading through some relevant threads here, and studying some good books. You will find recommendations in the threads.

For your information: Most people here who make a significant income from trading sell options instead of buying them. There are ways to limit risk. You will find them in some of the threads here (eg. "Seling options on futures" and "Diversified option selling portfolio").

Good luck !

Best regards, Myrrdin

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  #8 (permalink)
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@ClearTrades, I invite you to read this wonderful thread....

https://futures.io/commodities-futures-trading/8317-trading-futures-options-protection.html

Additionally, spend a few weeks reading through this forum, esp this folder :
https://futures.io/commodities-futures-trading/

and this one:
https://futures.io/options-futures/.

It's time well spent - I learnt more from these than I did from any Futures book I came across.

Best regards.

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  #9 (permalink)
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Being continually long protective options will almost certainly severely limit if not eliminate the profits from trading the underlying futures. Try doing a backtest.

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  #10 (permalink)
Market Wizard
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You can trade risk limited vertical spreads using options on futures. I just wrote several articles on this at my blog. You would not need the future. You would only need a long put and short higher put, i.e. for credit spread, and you can still get good leverage and most other futures benefits (no PDT rule, weekly expire, smaller contract risk).

If you want to trade futures, you can protect yourself, to large degree, by not holding the contracts over any closing period (i.e. daily or weekly), monitoring for market moving events and being flat going into them, not trading too many contracts, not trading overnight, and only trading liquid products that you understand.


ClearTrades View Post
So here's the thing, I want to trade futures because of the leverage, but at the same time I am terrified of the leverage. A personal friend of my father lost his house and everything he owned because his futures trade went unexpectedly in the wrong direction. I told my father about my interest in trading futures and he is strongly opposed to it and told me "there is unlimited loss potential and stay as far away from them as you can. You never know if your stop loss won't get filled and you get suck with major losses like if your stop doesnt fill in a limit-up or limit-down type of scenario.

So my question to you who do trade futures for a living, is what do you do to protect yourself from this risk? I was thinking that the unlimited loss potential can be limited by buying out of the money calls and puts. Is this the best strategy? Can anyone give me an example of how i can "safely" trade futures?

Is my dad correct? Or is buying options a good way to cover yourself and get around this risk?

For example the CL contract. Let's say it is $60 per barrel and you have 4 contracts and all of the sudden the market slams $10 down to $50 nd your stop loss doesn't get filled. You have just lost $40,000. Is there a way to effectively mitigate this risk to say a max loss of $10,000 in this situation with options?

I appreciate any insight you have to share.



Last edited by tpredictor; March 17th, 2019 at 10:22 PM.
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