Using options as a stop

R

rickty

I'm interested in getting some details about using options as a stop for futures intraday trading. More specifically, say I'm long 10
emini SP (ES) and I've determined that I would like to enter my (put) option's stop if the ES price reaches, say, a level of 1400.

My reason to use an option as a stop is that I would like to guard my downside but at the same time if the ES rebounds I would exit it with a profit and exit the options at a small loss.

The questions I have are:
1) How far in-the-money should the put option be to be used as a stop? In other words, if the option stop is entered at 1400, what would be a good strike price of the option that I use?

2) How many put contracts do I need to buy to completely hedge my 10 ES contracts?

3) Since I'm interested in day trading, I would imagine that the front month (serial) option would be the best? For example, now I would be using the April expiration options.

Any information concerning this would be appreciated.
 
Without an entry price for the ES, your questions are vacous.

FWIW, what you are asking requires duplication of many of the inhouse software systems MMs use. It is not trivial to set up and requires quite a bit of domain knowledge.

nitro
 
Quote from rickty:

I'm interested in getting some details about using options as a stop for futures intraday trading. More specifically, say I'm long 10
emini SP (ES) and I've determined that I would like to enter my (put) option's stop if the ES price reaches, say, a level of 1400.

My reason to use an option as a stop is that I would like to guard my downside but at the same time if the ES rebounds I would exit it with a profit and exit the options at a small loss.

The questions I have are:
1) How far in-the-money should the put option be to be used as a stop? In other words, if the option stop is entered at 1400, what would be a good strike price of the option that I use?

2) How many put contracts do I need to buy to completely hedge my 10 ES contracts?

3) Since I'm interested in day trading, I would imagine that the front month (serial) option would be the best? For example, now I would be using the April expiration options.

Any information concerning this would be appreciated.
More...

Delta hedging would achieve a complete hedge over small price changes. So if you're buying ATM options, which have a delta of around 0.5 then you need 2 option contracts for each futures contract. However, this would work both ways, meaning that you not only won't lose anything, but you also won't gain anything cause the entire gain on the futures will be offset by the loss on the options.

Buying 1 for 1 creates a synthetic long call and achieves a full hedge only at expiration of the options.
 
Quote from rickty:

Is there anyone who uses options as a stop?
More...

If you are going to spend the money on options, why not just buy an option for your position in the first place???
 
if you're going to do the stock and options transaction simultaneously, then there is absolutely no reason to buy/sell stock and buy/sell an option with it in certain situations.

If you're going to..

Buy stock, sell call: instead, just sell a naked put
Buy stock, buy put: intead, just buy a call
Short stock, buy call: Just buy a put instead
Short stock, short put: sell a naked call instead

There's no reason to do 2 transactions instead of 1.

If you're doing the transactions seperately, then i don't think using an option as a stop is too good of an idea, since it often takes a LONG time to get an order filled at a reasonable price.
 
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