Risk mitigation.

[TradingDemystified]

I bet that if they actually provided us with some decent stats, we would see that their trades don't offer any better stats than what a technical trader can accomplish, and I bet that their use of options would also not prove any better at extracting profit from the market than the use of a stop and target.

I think the difference is that with options one could construct a position designed to take advantage of the passage of time, or of changes in Implied Volatility (what the market thinks about how risky the underlying asset is) understanding that the risk for that trade is transferred somewhere else (violent move, etc). This flexibility is what makes options appealing to traders who do it for a living.

Make no mistake though. There is always a risk you are incurring for any potential reward, TINSTAAFL and in particular option traders (the good ones) are more aware of this than anyone else.

 

[Overnight]

OK then guess you are now ending this thread as you have found your answers. How valuable a resource is this Elite Trader... Just Post and there you go-- Answers appear... How cool is that...

The thread will end if I decide to end it and ask a mod to close or kill it. I started it, and I can end it. But why should I? There may be more answers forthcoming that will give me more ideas to allow me to be profitable. It would be folly of me to "end it" at this time.

But I did get some immediate answers which tell me to not pursue options at this time. The advice saved me some brain-cell power. You know, kelp and stuff. Kelp is just gross.

 

[Gotcha]

I think the difference is that with options one could construct a position designed to take advantage of the passage of time, or of changes in Implied Volatility

This is an interesting note, thank-you. Yes, I do recall reading that with options, time is a huge factor, and money can also be made if the thing doesn't move but time continues, which clearly it will do. But there are so many factors here now that for the general person, its impossible to do it well. It seems that options relies on being the best at the pricing game, and this isn't exactly what a retail guy is probably going to be good at if all he wants to do is hedge a position.

 

[Gotcha]

The advice saved me some brain-cell power.

If I may offer personal experience here. Using brain power to figure out how to ensure a position works out is a fairy tale. Some positions work, and some don't. Sure, you don't want to be doing something stupid like selling at the low of the day or buying into resistance, but figuring things out can only go so far. You're trying to predict the future of something that hasn't happened, which is impossible. Its best to work on stats on a whole subset of trades, patterns, entries, etc., and seeing how small of a stop works best, and working on the psychological game of staying with a profitable trade and never scared to take the next trade.

 

[comagnum]

You could consider trading around a core position - like going long or short on CL and then trading the counter moves that go against the core - this way you don't have all that drag on your upside. This is widely used strategy - Jim Cramer sites this as his favorite strategy when he was killing it running his hedge fund.

 

[Overnight]

If I may offer personal experience here. Using brain power to figure out how to ensure a position works out is a fairy tale. Some positions work, and some don't...

Yes Gotcha, I gotcha'. What I meant there is that I saved brain-power in not trying to pursue option options at this time, based on the feedback. I am an older folk and cannot absorb like a sponge as I used to be able to. For now I will just stick with what I know is working for me. Options fascinate me, but they scare me as well because I do not understand them. Apparently I cannot use them to my advantage at this time. Alas.

 

[TradingDemystified]

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.

To answer your question:

(using all options on the same expiration as expiration of Futures contract)

1) Buy a put
It costs money, which you will have to make up for in your contract going up but you will lose only up until your contract's price hits the strike price.

2) Sell a call for a credit -Covered Call-
Receive a premium in exchange for foregoing gains in your contract beyond your strike price. If the contract goes down by an amount larger than the premium you received for selling the call, you will start to lose one-to-one with your contract so it's a limited protection but on the other hand if absolutely nothing (or very little) happens you get to keep the premium, which could then be the source of profit for the entire trade.

There are more ways you can tweak your position but they are all somewhat derivative of these 2

Hope it helps

 

[Overnight]

To answer your question:
...

Thank you TMist, that is the sort of meat I need with my potatoes. Unfortunatley I need to relegate that portion of my tiny brain into the corner with a pointy hat and just focus on what seems to work (for me). *sighs*

 

[Gotcha]

To answer your question:

(using all options on the same expiration as expiration of Futures contract)

1) Buy a put
It costs money, which you will have to make up for in your contract going up but you will lose only up until your contract's price hits the strike price.

2) Sell a call for a credit -Covered Call-
Receive a premium in exchange for foregoing gains in your contract beyond your strike price. If the contract goes down by an amount larger than the premium you received for selling the call, you will start to lose one-to-one with your contract so it's a limited protection but on the other hand if absolutely nothing (or very little) happens you get to keep the premium, which could then be the source of profit for the entire trade.

There are more ways you can tweak your position but they are all somewhat derivative of these 2

Hope it helps

Excellent example. Are you able to go into a bit of detail about the differences between 1 and 2?

I imagine that with option 2, there is more margin requirement since you're selling an option, and not buying an option which is fairly cheap. Also, I think I've read that buying puts vs. selling calls won't example move the same way. (ie. if a put gains 20 cents, the call, that you're short, can go up in value more than 20 cents).

For number 2, if the contract goes down, and hence loses value as you say, and is of limited protection, this should be ok since you're already making much more on holding the original CL contract anyway... right? Just trying to understand how selling a call is different from buying a put.

 

[truetype]

You want to gain up to 51, and not lose below 50. That adds up to a 50/51 callspread. All other permutations are just more expensive ways to implement it.