Risk mitigation.

Overnight

Overnight

I told myself once I would never get involved with options, because they are scary and I don't understand them. My brain doesn't compute them properly.

But I understand they can help mitigate risk. So let us envision a scenario, and I need help with this from the option gurus here. Music to listen to while we work this out.


I enter a position long in May CL at 50.00, one contract.

My target to exit is 51.00. This will give me $1,000 profit. How can I use an option to...

A) Protect the profits as the price goes up from entry...

B) Stave off losses if the price goes down from entry...

C) Possibly make profit on both the underlying and the option, no matter which way the price moves?

What I do not get, aside from options in general, is what happens when you choose an option when you already have ownership of the future underlying the option.

The thing I am not getting in my head, is entering an option when you already have ownership of the underlying future. I suppose this is what they call an "option on futures"?

Am I making sense or are these just dumb questions? Anyone? Help? I do not like my current method of risk-mitigation, it is too much risk exposure. Options might be a good solution. I just dunno'.
 
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Essentially you want to own a 50/51 callspread, which doesn't satisfy your condition C. As minmike correctly suggests, A+B+C adds up to a circle you can't square.
 
truetype said:
Essentially you want to own a 50/51 callspread, which doesn't satisfy your condition C. As minmike correctly suggests, A+B+C adds up to a circle you can't square.
More...

Then why do the exchanges keep spouting off options as being a great way to "hedge"? If I already hold a future, why can't I use an option on that same future to "hedge" against an adverse movement on that underlying future?
 
Overnight, Yes your questions are important to trading success. So what can I do to assist?

Am I making sense or are these just dumb questions? Anyone? Help? I do not like my current method of risk-mitigation, it is too much risk exposure. Options might be a good solution. I just dunno'." You are correct and now you are looking to fill in the "I just dunno"?

It will be hard to provide you the rather complicated answers here. So contact if you are really seeking Real answers -- through a Private Thread.

The reason is that you should be bombarded with lots of response to this intelligent thread and I do not wish to be "competing" with all the so-called gurus.

Last edited: 32 minutes ago
 
minmike said:
read about options synthetics. it will help your understanding. most of your goals are unattainable with options.
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Thank you. I took a cursory glance at synthetic option definitions, and it is definitely not what I expected. But at least I know now what that condition is called, by owning a future and then optioning it.
 
It sounds like what you want to do is to insure that you have no downside risk with only upside potential. Sound perfect, and yet I would assume impossible. I know we have our resident expert Handle123 who says all his long term trades are hedged, but of course he never shows exactly what this means, and it leads others to believe that this is possible.

Your question is excellent though, so I hope there is some good feedback, but I don't see how any of this could be possible. All you can really do in my opinion would be to reduce the amount you would lose. For example, if you you're hoping to hit $51, but your stop is equally far away at $49, then you'd be down 1k. If you buy some puts, you make money on the way down, but clearly not as much as the money you would make on the way up. So all you're really doing is essentially making 1 CL contract worth less.

I've seen something similar with people who would long 1 ES, and short 1 YM, and hence make each tick value a bit smaller than what the ES is. (of course there are issues with this)

Your risk mitigation in my opinion is a stop, that if hit, takes you out of the trade. If you can't handle whatever stop you're using, this means your stop is too big, your account is too small, etc. If it was so easy to enter a position and not worry about the risk, well, everyone would be making money, which is impossible.
 
MACD said:
Overnight, Yes your questions are important to trading success. So what can I do to assist?...
More...

The definition of synthetic options gave me the insight I needed. Minmike steered me to where I needed to go, which is basically to stay out of that room 237
 
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