I refuse to give up but need another option(no pun intended)...

Overnight

Overnight

Hi there.

For those who follow my journal you will have seen that I have made good money while swing trading futures. I screwed up last week by not properly hedging against a possible downturn with an offsetting position which I had been doing on and off. I got complacent and it bit me.

I have also been swinging without stop because of the bull runs, using time as an edge for eventual market recovery.

Well, last week it all hit the fan and I couldn't take the swings and took the major hit by closing. OK, yes, it was the largest point drop in Dow history. I didn't expect that. Who did? And based upon what all the talking heads are on about, this could be the start of that kind of volatility for some time to come.

Hedging against a loss with an opposing position is great for one thing... Net zero +/- a few hundred bux. So now I have to tread where I have feared...options on futures.

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So let us take this scenario...

I am long one future contract on YM at 26,000. I want to make $1,000 so my target is 26,200. No stop. Max risk I am willing to take on the future is $200. (Without an option the stop would be 25,960. Not enough room to breathe).

What would I do (and how would I do it) with an option on that future to assure just a max of $200 loss, but allow the target to get hit at 26,200?
 
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Just off the top of my pointy head, I'd say that small amount of possible loss will be very expensive to buy

You probably want to just buy a call. And pray hardly.
 
I think you need to learn more about options before speculating with them. Limiting your loss to 200 is easy. As Soes said, buy a call for 200...done. but your delta will be different than a long future position and you're taking on other types of risk. Your whole risk return will be different. It might be better to focus on your process?
 
I don't see the point of options in combination with swing trading in a narrow range.... the cost is too big... it's not going to work. Because you would want puts when you do a long trade.... and than if you swing to a short trade... you would want calls for cover...

It would be better to just buy the call, like Soes and jjapp say... makes it easier.

However... you're obviously not getting the same trade dynamics.

Do you look at how much you want to make, or do you set a price target? Looking at what you want... you need a risk/reward of 1:6

It's easy to just buy $200 worth of calls... with risk/reward of 1:6, that call needs to be up 500%... which is a lot.

Looking at DJX options... the ATM (249) call for next expiry (30 days) is about 4.50... so 1x cost you $450. If you want the same risk/return... that call needs to be at 27.00.... that's not going to happen unless we hit 27600 in the Dow.

You could go for further OTM calls. but you still need that 500% return. No 30 day option will give you that return within a relatively small move anyway close to what you were aiming to get with your futures swinging.

You might get there if it's got one day to go... probably less than one day.

So... to face the music.... on a day to day swinging basis, options are not going to work for you.
 
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You could just buy a straddle and work off that... which means if you have enough straddles to cover your futures position... long or short..., which I assume you normally do (long and short swing trading)... you will be covered for a big move like this. But that will cost you quite a bit in premium... And to cover that premium you need a big move or lots of profitable swing trades.
 
Or... with my example of DJX calls... you would buy more of them... say $4.500 worth so 10 options. They would be worth about 5.5k (profit 1k) when the Dow is up 200 points. But you need to hit the sell button when it's down 50 points to maximize your loss to $200.

So you basically get the same situation as in your swing trade example. But you also open yourself up to implied volatility moves.

Unfortunately it's not as easy as it all sounds O.N.

I think you're risk/reward is too hopeful. You won't get 1:6 anywhere on a daily basis.
You probably need to put your stop lower and get to 2:3... which leaves you with more room to work with.
 
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Visaria said:
He wants 5 to 1 risk, not 6 to 1.
More...

Yeah... I get that.. he wants to make 1k but only max loss 200... 500% return on an investment gives 6:1 including the value... So I meant it in value terms...

So to get there with options, OP buying $200 worth of options, he needs the options to be worth $1200 to get to 500% return.... 6:1 on value... whatever you would call it.

Tit for Tat really... it's besides the point I'm making... you can't get there that easily with index options... not on a daily basis.
 
Only scanning the thread (not really participating...) but when things get sticky in SPX/SPX options, then ES/ESFOPs come into play. Even the SPY/SPYoptions can help.

So, I'd offer the DIA into the conversation. IF it helps. (Accompanied by all the caveats that run SPX/ES/SPY stuff.)
 
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