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Strategy of Buying an Option with a Futures position
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Strategy of Buying an Option with a Futures position

  #1 (permalink)
Chattanooga, TN/ USA
 
Trading Experience: Intermediate
Platform: Ninjatrader
Favorite Futures: 6E
 
Posts: 47 since Jun 2016
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Strategy of Buying an Option with a Futures position

Hi Guys,

I have an idea for a different take on this Hedging strategy and wanted some constructive input on it. So yes I guess its also called a synthetic put or call right?


So for example, if I buy 1 contract of 6E and also Buy 1 OTM Put (1 month) on the 6E then I have a Hedged position; somewhat. If Price goes Higher than I will make money if its high enough to cover the cost of the Put. If Price goes lower than I will lose some money because the Put was OTM and because of the Premium paid unless Price goes low enough to cover the lose. I get it. But here is where my strategy differs.


So lets say I have the same setup as above; however, I place a 5 tick Stop on my Long 6E position. Now if price goes Lower my loss is limited to the 5 tick Stop + the Premium paid for the Put. If it continues to move Lower than I enjoy the benefits of owning this Put.

But then you might say what if Price moves up again? Well if that happens then I will Buy another 6E contract at the same Price ( if Price doesn't move that low) or Lower Price Depending on where the Support/ Resistance line has formed. Preferably I would want Price to move Below where I bought the Put at. Then if Price moves back up I would Buy the 6E contract at or close to the Price where my Put was Bought.

No its not perfect but it allows me to play both sides if need be. Price can move far either way in a months time. I know commissions play a part here as well.



Any thoughts?


Cheers,

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  #2 (permalink)
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  #3 (permalink)
Legendary Market Wizard
Chicago Illinois USA
 
Trading Experience: Advanced
Broker/Data: IB, ToS
Favorite Futures: /ES, US Equities/Options
 
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Hey...


Yes, you have the theory correct. You are legging a synthetic long call. Long underlier, long ATM put is a synthetic long call.

One way to "go neutral" and lock a profit that you might consider is to leg on or off the conversion. A conversion is described as long underlier, long put, short the same strike call. When done at the money (ATM) the difference between underlier and synthetic short, less expenses, is your profit. Selling the call raises cash where buying the underlier uses cash (lots more of it too)

You can see where legging in and out of the position locks or opens the position for profit. You do essentially have a way to make money either direction. Keep in mind three things: You still have to be right about directional movement when legging the position. Your expenses to trade this way will mean that to make any money you will often have to accept more risk than 5 ticks to break even. Other aspects do take hold of option pricing, like time and volatility.

If you are inclined to develop ideas using options I recommend two books: Options Volatility and Pricing, by Sheldon Natenberg and Options as a Strategic Investment, by Larry McMillan.

All the best to you.

Dan


Last edited by wldman; April 18th, 2019 at 08:49 AM. Reason: change on to in, second line
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  #4 (permalink)
Chattanooga, TN/ USA
 
Trading Experience: Intermediate
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Thanks wldman.

Sorry to say I'm a little rusty in the options lingo since it's been awhile since I've used them. Can you explain what a long underlier is?

Cheers,

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  #5 (permalink)
Legendary Market Wizard
Chicago Illinois USA
 
Trading Experience: Advanced
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Sure...


StreetPreacher View Post
Thanks wldman.

Sorry to say I'm a little rusty in the options lingo since it's been awhile since I've used them. Can you explain what a long underlier is?

Cheers,

For equity options the underlier is the individual stock. The underlier refers to the product on which the derivative product (option) is based. It your example that would be the 6E.

BTW, if the micro 6E has suitable liquidity for your trading frequency that might allow you additional flexibility in legging.

Best of luck.

D

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  #6 (permalink)
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wldman View Post
You still have to be right about directional movement when legging the position.

That's the key!

Any futures and options position can be boiled down to a delta/Price & vega/Volatility position. Call the directions correctly and you make money, wrongly and you lose. The ultimate structure just changes your risk/reward payouts.

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  #7 (permalink)
Chattanooga, TN/ USA
 
Trading Experience: Intermediate
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Favorite Futures: 6E
 
Posts: 47 since Jun 2016
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need a good platform

Thanks for the replies guys. I really need a good platform and account to practice on. Any thoughts on DeCarley?

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  #8 (permalink)
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StreetPreacher View Post
Thanks for the replies guys. I really need a good platform and account to practice on. Any thoughts on DeCarley?

DeCarley
- provide very good service (more personal)
- emails get answered very quickly and their on-line help 'chat' function is good too
- they are good if you plan to sell naked options as their margin requirements are reasonable.
- however, the comms are on the high side.
- the Zaner platform is not ideal

Interactive Brokers
- Excellent TWS platform, very powerful
- lower comms than DeCarley
- service lacking (every time I use the online chat function, I can spend at least an hour and very
often end up with no resolution)
- TWS really has all sort of complex order types, alerts, bells and whistles which can be very good if used
- very high margins for selling naked option (esp on commodities)

I have accounts with both.

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