The Lottery ticket
YOU MUST ALWAYS BE AWARE THAT THERE IS SIGNIFICANT RISK INVOLVED IN TRADING FUTURES AND/OR OPTIONS ON FUTURES AND ARE NOT SUITABLE FOR ALL INVESTORS.For all of you that emailed me for specifics on buying the put options in the Eurocurrency markets, you are like a short dog in tall grass!!! If you recall my comments from December 27th, I suggested that the Eurocurrency's were on an extreme and that you should consider buying a put option. The March Eurocurrency future was trading at 136.28 at the time. Today's March futures market is trading at 129.92. This is a 636 point decline! The value of one short futures contract would be worth almost $8000 dollars before commissions and fees are deducted. Obviously the risks involved in selling or shorting the futures market in a dynamic uptrend were far too great for us to consider selling a futures contract. That is why I suggested buying a put! For those of you that bothered to email, you know that I like spending approximately $750 per lottery ticket. I suggested you buy March Eurocurrency 130 puts for approximately 57 points, or $712.50 before commissions and fees. That 130 put is worth 174 points or $2,175 today. You would be enjoying a net gross profit of over $1400 per contract before commission and fees in less than 25 days! Not a bad risk reward. You can adjust your risk reward tolerance to fit your own trading style. The ultimate risk in this scenario would have been to sell a futures contract. It obviously would have been the most profitable. You could have also chosen to buy a put that was closer to the actual futures price, or closer to "at-the-money". This would have cost you more to initiate the position, but it also would have a greater current value than the "out-of-the-money" put we suggested you purchase. My point is that you can construct trades that fit your risk profile. I would be inclined to take the dough on the long put. You never go broke taking a profit. This is pretty immediate gratification. Don't look a gift horse in the mouth. I'll be back soon with some more option trading ideas.
Steve
posted by steve erdman @ 1:33 PM
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