What to choose : ITM Options or direct the future

Hi

I am a little stuck with this question :

Directional trading can be done with naked options and futures. Are there traders here which trade direction with itm options and why did you choose the itm options and not directly the future ?

Are there any strategy decisions behind that ( Hedging ) or is it just because you love options or what gives the advantage or disadvantage of choosing either options or the future.

If I think about the delta, I am clear that the future has a delta of 100 and the itm option between 51 - 100, depending how deep you go in the money. Theta, gamma and vega are other factors. The more delta, the more it moves like the underlying.

If you now take the risk to trade the deep itm option, you also have to apply your rules like you have to do when you take the risk to trade the future. You will also use a stop loss, you will define an exit point, you will define a trend follow rule and so on. With the stop loss you can define the risk and you can make that equal for the option and the future by risking the same specific amount of money.

So, what makes it worth to trade the itm option and not direct the future ?

What do I miss or fail to see in my considerations ?

D.S

Thanks for your reply. So you're going long 1 ES contract per 1 ES put when you put the position on ATM with the weekly options. The 7 tick level for profitibality would be at or very near expiration on the weekly options based on my experience (and assuming no legging). You mention potentially closing out mid-week ... which means there's still some Theta(time) component in the option premium as it's decaying. I feel like I'm missing something here for some reason. I'll track what you've described and see what happens ... appreciate your input! If there's any additional input I should be looking at, let me know if you would.

Originally posted by grednfer


Monkey,
I don't trade the futures options using normal option metrics....like delta.....bla, bla.....I just use them to establish my "floor"

So when I buy the 1330s in an ascending market, my principal challenge is to buy both puts and futures simulataneously.....
Its works well with ES because of the weekly options. If you buy 1 put contract for $350 with 1 ES future all you need is a tick over 7 points for profitability....and its usually better cuz you can still dump the puts.....for usually more than 0.

For example the 1360s closed Friday at $325 per for this week....which is a good deal.....but I try to wait for a low on Mon or Tues......

I go at-the-money and 1-1 coverage. Any time I can go ATM before Weds close for $200 per is a good deal also. I don't look at delta...don't care.....I care about cost and probability of upside.

Monk,
What can I say.....I did it again today.....1355...its got a little wedgie going but it was 18 points off the top from last night....so we'll see.

The Silver short worked good today.....I used SLV, its very liquid....short from 46....and it fell all the way to below 43....so I moved the calls down there at the EOD. I think thats the first time I've traded an ETF in years.

The trick is to get the even numbers......at the strike.

... so long the futures at 1355 and long the wkly 1355 puts expiring this Fri. What was the price paid for the puts ... thinking around 6-8 (been following things as you'd described)?

Correct my take on the play if I'm "off" ... but your obvious risk is the cost of options give or take a tick or two. And the reason for the trade is the expectation for the ES to move up. How many points above 1355 would be the place you exit typically?

For example, as a loose hypothetical, the market is up to 1365 and the puts have dropped in price while the contracts gained 10 points ... if covered, the profit would be the difference between 10 points of ES long contracts minus the decreased price of the purchased puts ... perhaps they can be sold out of at 2.

That'd be 10 ES contract points minus the loss of X on the puts (let's say they were bought at 7 and are now 2 = loss of 5 on puts) ... so you'd be looking at the current ES profit of 10 points minus the 5 points lost on puts for a gross profit of 5 points.

Just wanted to make sure I understand correctly what you're doing ... seems pretty straightforward. Let me know if I'm reading it right bud.

Obviously, the preference is for as large a magnitude move up within the week. If you could, lemme know if it goes against the position (down), do you take that total "known risked" loss, or do you have a stop loss before that. And more importantly, when/where it's profitable, what is the strategy for exit?

This will give me a better handle on what you're looking at for a risk/reward ratio (in a loose sense). I'm elaborating on this since a couple of max losses would eat into the profitable trades unless there's a really decent magnitude move up within the week on a semi-regular basis (20-40+ points) ... but that also is predicated on what strategy and at what price level you look for as profit to cover the position.

Hope you see where I'm coming from on this ... primarily exit strategies for wins and losses which, based on the amounts, would then lead to what is the "real" RISK/REWARD picture for one trade and over time as well.

The Funky Monkey

Originally posted by grednfer

Monk,
What can I say.....I did it again today.....1355...its got a little wedgie going but it was 18 points off the top from last night....so we'll see.

The Silver short worked good today.....I used SLV, its very liquid....short from 46....and it fell all the way to below 43....so I moved the calls down there at the EOD. I think thats the first time I've traded an ETF in years.

The trick is to get the even numbers......at the strike.

The weekly ATM es puts (& calls) are generally about 300-350 per....on Mondays.
The monthlies are 7-8.
I think I got mine yesterday at $275.......
However, the trend was easily down this morning (still from Sunday) so I dumped the futs at 1357.....and rode the puts down to ? 47..... and dumped the 55s.

It made money but not what I'm looking for.....

What I'm looking for now is to see if the downtrend will continue or if they ramp it to shake out those guys from Sunday night at 1373. Its been difficult to short this market as the trend has been UP for the past 2 years.......but that may change soon.....we'll see.
Its hard to trust a downtrend that looks so uniform.....real down trends are more violent....this looks too controlled.......too linear.
Tempting to short right? If it fails the 50 on the 60M chart tomorrow and drops 30 points that would be a good start.

The silver trade was a total bonanza! I just move the calls down at the end of the day.....started with 46s now have 40s. It would funny if it went back to 16.

For the options, you were talking dollars and I was talking points ... so the $300-$350 is 6-7 points ... I was using 7 points as an example scenario above, where the market would go up, with put prices dropping to 2, for a 5 point loss on that side of the position to be matched against the "X" points of profit from the long ES contracts. As to exit strageries I'd asked about, no hard and fast rules ... you're basically trading around the position (ex. silver) and legging or dumping one side of the position (ex. covering ES contracts and riding puts) based on your read of the market. Good 'nuff. Glad ya got a nice 'un working on silver.

Originally posted by grednfer

The weekly ATM es puts (& calls) are generally about 300-350 per....on Mondays.
The monthlies are 7-8.
I think I got mine yesterday at $275.......
However, the trend was easily down this morning (still from Sunday) so I dumped the futs at 1357.....and rode the puts down to ? 47..... and dumped the 55s. ...

HI,
I'm posting about the e-mini $5 Dow futures. Therein lies my confusion. I haven't applied these strategies to the other markets. Please reply with your experiences. Thanks

Monk,
I originally replied to the thread because the question was ITM options or the future and I wanted to share this technique of using both simultaneously....its been very profitable. But if I'm on the wrong side I have to exit and re-position and get with the trend.

How about that 50 failure this morning.....now I'm on the right side...sold 53s bought the 55 calls.

Although its working, I don't like trading SLV....it consumes to much cash.....a very smart person here in the office pointed out that if we had applied the same cash to last months NQ trades we would have made over $3M......