The 3Dimensional Trading Breakthrough
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<strong>The</strong> 3 Dimensional <strong>Trading</strong> <strong>Breakthrough</strong><br />
This should give you an idea how the option should work for us. Now, we will<br />
investigate the methods of selecting the best value for our option “insurance<br />
premium.” You will find that if you traded options only (to speculate the market),<br />
you would have to be an options expert to consistently realize profits. My overall<br />
technique for options, used as insurance, solely requires the ability to merely<br />
add and subtract simple numbers. I want to give you an education about what the<br />
professionals look at in selecting options. Selecting the “right one” will depend on<br />
your personal risk tolerance, but at least you will know your risk, up front, before<br />
you execute the trade. Let’s tie in what you learned in the previous section.<br />
ATM / ITM – Defining Maximum Risk Up Front<br />
When selecting an option to be used as insurance (for your futures contract), you<br />
must determine the premium to be paid and evaluate if you are comfortable with<br />
this premium versus the expected reward (or outcome).<br />
Let’s say I wanted to go long June Live Cattle. I want to buy insurance along with<br />
it, so I will look for an option with a strike price nearest the price where I plan<br />
on going long. Take a look at the example here and you will see the different<br />
strike prices for this contract. Remember, since I am going long the futures, I am<br />
buying an ATM or slightly ITM put option for insurance.<br />
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