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If your future-option moves to become very-in-the-money and you are worried
about slippage then you may as well just hedge your option with the future
(I think) and wait for expiry. Maybe Michael/someone can confirm this makes
sense.
eg long 100 strike call option when market is say 200 would make the delta
say very close to 100% (effectively a future). Sell the appropriate number
of futures here. You will have effectively taken the profit at that price.
Should the market then retrace back to 100 before expiry then you will have
a worthless call option but still have the profit on the future hedge.
Regards,
Robert
-----Original Message-----
From: DH [mailto:catapult@xxxxxxxxxxxxxxxxxx]
Sent: 03 July 2001 19:57
To: Omega List
Subject: Re: AW: Options - was:Globex2 in home
Michael (who knows a helluva lot more about options than I do) wrote:
> The message I tried to convey with my little example was
> that the price of the underlying has to move quite a bit for the liquidity
> of an at-the-money option to dry up in any noticeable way (of course this
is
> true only for reasonably liquid markets, not for cotton or lumber). Option
> trading when done right will give much better protection than the use of
> stops; therefore, a certain amount of slippage is perceived by the option
> trader to be a comparatively cheap price to pay for this added safety.
I wonder if that's really true for index futures traders? Options on
futures are notoriously illiquid. While you might be able to purchase
your "insurance policy" relatively easily, you might have a very hard
time cashing it in if you actually needed it and your options had moved
deep in the money. All the liquidity would be at the new ATM strike
after the big move.
You could use options on the underlying, for the better liquidity, but
that would mean using two separate accounts for futures and stock
options. A big profit in your stock account wouldn't stop a margin call
in your futures account. Settling a trade in your stock account and
transferring the money to your futures account would likely take more
time than your futures broker would be willing to give you.
--
Dennis
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