Futures vs Options

[pb]

Hi,
I understand futures, but I'm very new to options. I have just started to read the materials at the options forum here at T2W. I have a very basic question, if you guys don't mind.

Given that options are far more complicated that futures (with strategies more difficult to learn), why would anyone trade them at all? There must be some serious risk/reward reasons for people to invest in options instead of sticking to futures. Could someone elaborate please?

Thanks very much.

 

[The General]

If you area buyer of the option your downside is limited.

You can construct strategies for almost any perceived eventuality. For instance suppose you were mildly bearish, you could buy a put at one strike price and sell one lower down, thus reducing your overall cost. Maximum profit would come when the price is between both strikes (actuall just above the strike of the short put).

Just an example.

 

[osho67]

selling optioms is a good game. Most of them expire worthless and the premium is paid upfront. Regular income 15-20 percent.

 

[The General]

Osho,

All well and good for 85% of the year. Then comes the one that wipes you out mate........

 

[The General]

And then some....

 

[RogerM]

pratbh - futures are one dimensional, i.e. they either go up or down along a line directly proportional to the move in the instrument you are tracking. Options are 3 dimensional in that the price is influenced not just by the price of the instrument you are trading, but by time to expiry and the volatility of the underlying as well (and to small extent according to changes in interest rates and dividends). So whilst there are more things that can go wrong, there are also more things that can move in your favour if you get it right, or even partially right.

The General - your observation is a very sweeping one. If you jump out of a plane you're going to get hurt, but no mention of whether you are wearing a parachute, and also carry a reserve.

e.g. Which has the greatest risk? Investing £44,300 in a FTSE tracker fund, or selling one naked October 4375 Put at todays price of £490 per contract?

If the market rises 200 points to (say) 4630, you make a profit of about £2000 on your tracker fund, and a profit of £490 on your naked put which expires worthless.

If the market falls 200 points to 4230, you lose -£2000 on your tracker fund, and on your short Put, £10 per point for every point the index goes below 4375. In this case that's 145 points, or £1450 - but as you keep the premium taken in of £490, your actual loss is -£960.

If the market tanks 500 points on a terrorist attack, you will lose -£5,000 on your tracker fund, and -£3960 on your short put. These prices are based on expiry - in the short term you may lose more on the option as Implied Volatility increases. But you can hedge your position by rolling it down, or rolling out into a later month, or by selling a future, or selling calls - or a combination of several of these.

Obviously the point here is not to expose yourself to more risk than you feel comfortable carrying. Problem is, people who would not want to hold shares worth more than £10,000 shouldn't be selling 10 contracts a time in the FTSE, which in effect gives you exposure to £443,000 of FTSE stock.

 

[The General]

Roger,

Don't know what you are talking abt -- i said buy (for example) a 4300 put and sell a 4200 put.

???

 

[RogerM]

The General - I was referring to your reply to Osho about selling options to take in premium.

 

[The General]

oh sorry then

 

[The General]

btw how do you figure (in the eg above of a 500 point decline) a loss of 3250 on the short put ?

also, i take it that's a game your into - selling options ?

 

[RogerM]

btw how do you figure (in the eg above of a 500 point decline) a loss of 3250 on the short put ?

also, i take it that's a game your into - selling options ?

Whoops! Finger trouble! That what happens when you reply in a hurry. I've corrected the example in my piece above for the sake of the archive.

Index at 4430. sell Oct 4375 Put for 49 (i.e. £490 per contract).

If index rises, or at worst falls 55 points to 4375, then the put expires worthless and you keep the £490 premium.

If index tanks 500 points at expiry, to 3930, then the put is 445 pints in-the-money and you'll have to buy it back for £4,450. but you keep the premium of £490 collected up front, so the actual loss is -£3960. Would be more in the short term whilst there is still time value in the contract tho'.

 

[The General]

Roger,

How long have you been making money selling options mate if u dont mind me asking ?

 

[RogerM]

The General - been actively trading options for about 6 years. Mainly FTSE100 index options using a mixture of strangles, straddles, ratio spreads and synthetics. Despite my post above I am allergic to large naked put positions ) so normally underpin a short put position with long puts further down.

 

[The General]

What do you base your decisions on ? TA ?

 

[RogerM]

Yes, primarily TA with lots of sentiment readings. Then just play the odds, with lot's of backtesting and protection just in case there is a huge event, particularly out of hours, that moves the FTSE by a huge amount. So always, no matter what, I survive to play another day. Tend not to protect short index calls as I can think of nothing that would propel the index up 500 points out of hours and keep it going - so should always be time to hedge. Wouldn't risk naked calls on individual shares tho' - t/o bids etc.

 

[The General]

And you make your main source of income this way ?

Just trying to get a handle on where you are coming from thats all....

 

[RogerM]

It's just one of a number of incomes I have. I do a little daytrading and some swing trading as well, plus some other non-trading related activities. My view is that in the world as it is today, anyone who relies 100% on a single income - especially one that is dependant on someone else - is exposed. Far better to have a "basket" of smaller incomes than one equivalent bigger one. In this context, selling premium is one element in my "basket".

 

[The General]

like it !