The 3Dimensional Trading Breakthrough

The 3 Dimensional Trading Breakthrough
3) Never speculate the markets by purchasing options.
Always buy long / sell short the futures contracts and use the options for what they
were intended to be, “insurance.” You will find at times, when you are hunting
down a particular market because the conditions are just right (commercials vs.
public relationship and market sentiment, etc.) and place your trade, you will not
always be right. Accept this, for it is a fact in commodity trading. When you go
long/short a futures contract, do yourself a favor by purchasing an “at-the-money”
option in the opposite direction as insurance! I cannot emphasize this enough. I
have seen too many bull headed traders not want to put in a protective stop on
their directional trade because of fundamental conviction, fear of getting stopped
out then having to deal with high commission costs, or just plain being stubborn!
Listen, if your long futures position is protected by a “long put,” you still have
unlimited profit potential! Furthermore, the premium you paid as insurance can
still be recouped very easily without adding additional margin on your position!
If you are correct about the market and prices go up, your futures will make more
money than your option will lose in value. Continue to hold the put. When you
get a short-term sell signal you have three choices: 1) liquidate your futures and
reset at a lower price when the next buy signal presents itself , 2) sell short a call
option for an equivalent premium of what your put option has lost in value (to
recoup your loss), or 3) do both 1 and 2! Keep in mind you can also liquidate both
futures and options for a profit. Then reset later.
If your speculation of the market is incorrect, the maximum loss for your position
is the amount you paid in premium for “your insurance” plus/minus any amount
the option is in/out of the money if you hold the position until the option expires.
This, my friend, is the worst case scenario. When you initially took your position in
the market, you thought the market was going to go in a certain direction. Usually,
within a couple of days or so, you’ll find out if you are correct, or not. If you are
stopped out with a loss in your futures contract, your option will have made some
profit, so you will take half a loss, or a partial loss, instead of a whole loss!
You shouldn’t hold the position until option expiration anyway. If you do, that is,
hold an initial position for more than a week, I suspect there is some “hoping”
involved and you may be disregarding what the market or price charts are telling
you. The only decision you need to make in considering purchasing the option
is, “how much do I want to risk?” Do the option premiums warrant a buyer’s
market, or a seller’s market (are the options cheap or expensive)? You only want
to buy options with low implied volatility/low premiums. Then you are assured
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