The 3Dimensional Trading Breakthrough

Brian Schad
Here is the reason why we want to swap out the ITM option with an ATM option
(or as “close to the money” as possible) when the futures have dipped well below
the original long price.
Difference in
Strike Prices
Overall
Position Risk
Current
Profit/[Loss]
Overall Position
Risk minus
Current Profit
Long the futures
at
$302½/bu. with
310 put
Long the futures
at
$302½/bu. with
310 put
15¾¢
[$787.50]
9¾¢
$487.50
6¢
[$300]
16½¢
[$825]
13¾¢
$687.50
2¾¢
[$137.50]
In the above table, look at the second row under the column Current Profit / [Loss].
I want to point out that the 13¾¢ current profit reflects the 9¾¢ profit from the
futures and a 4¢ closed profit from offsetting the original 310 put option.
As a conclusion to this section, I want to enlighten traders to the importance of
futures price awareness in relationship to the corresponding options premiums.
This requires a very simple procedure of taking a step back to evaluate what the
least overall risk is for a position at any given time! Most traders will not do this
because they simply just don’t know how. You, as a trader seeking more knowledge
in this business, will never be second-guessing what position “should have” been
taken.
Buying back a “short-option” on momentum change
In the above section, I showed an example of offsetting the futures position and
then resetting anew. In this section, I want to demonstrate how selling the option
(that is covered by the long futures position to reduce risk) may be an overall
better method of trading with the trend.
As you may recall, we are long the Dec Wheat futures from $3.11¼¢/bu. We
purchased the Dec Wheat 310 put option for 15½¢. Our overall risk is 16¾¢. As
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