The Secret of Staying in the Game
...before using any of this information. You should also be aware that there is always a RISK, and it can be huge, when trading options or the underlying contracts. Albeit BUYING options {as opposed to selling options), are by design somewhat less risky because you can only lose the amount of the principle paid (The dollar cost of the option). Notice, there are about as many ways to use options, as there are traders to trade them. I will be telling you about only one of them. The secret to using options as insurance is knowing when to buy them. Just as you need to have insurance before you drive, you need to buy options before you buy or sell futures contracts… That is, if you are going to have that insurance for trading purposes. You may make more purchases of options after beginning a trade and for other reasons but to start with, this plan requires you to begin by buying one or more options. Repeat, in my experience the secret is BUYING THE OPTIONS FIRST before you buy or sell contracts. To know when to buy options for insurance you must first be prepared to trade. The reason for this is that it is easy to chicken out after you begin. So you should have your mind made up to make the necessary trades. Your analysis of the underlying futures should be suggesting a trade. This can work hand in hand with buying the option because the option volatility, that affects the price of an option, will often be less when it is appropriate to look at making a trade. You don’t need an opinion on the direction that the commodity will go in order to set up an Optionsure trade. When using this strategy you are looking to catch a breakout in volatility and price, if one happens, so allow the move to develop somewhat before jumping into a short or long trade against the options. You will often be tempted to jump in at just the wrong time so wait until you are very sure it’s a breakout. You must have enough data to check the volatility for at least the last 6 months before you will have enough information to make a decision to trade. A simple way to check the volatility of the underlying market is to set up a Volatility Indicator that measures the data over about 5 days and then measures it again over about 9 days. You might also want the indicator to measure the data over a period of 30 to 40 days so that you get a long-term perspective. There are many ways to measure volatility. Historical Volatility and or an average of the True Range are two that I use. When the 5-day Volatility is decidedly less than the 9-day it is a better time to look at buying the option(s). The long-term volatility should not be at a high level but it need not be extremely low either. I suggest that you buy at least one at the money option for each contract you expect to trade. Important, I usually buy another option one strike out of the money for each contract I plan to trade. Sometimes I purchase even a third option two strikes out for each contract I plan to trade. This allows me the flexibility of being able to take profits on one option and still be able to stay in a trade, as well as offsetting the difference in the value of an underlying contract. When one of the options (puts or calls) is much cheaper than the other at a given strike, I usually buy the cheaper or the two. If the price moves against your options you must be prepared to trade full contracts against these options that you purchased. Again, it is ineffective if you chicken out. If you have super strong opinion about the direction that the commodity will go you might want to buy the options against that direction because you can make more on the contracts. I’ve found that it is best to set up the trade thinking non-directionally, because the contrary nature of the markets fools most traders most of the time. You can trade a contract against the options by many different means and strategies, but using a stop above or below support or resistance is one reasonably effective way to enter a trade. Also if you take the average true range, over a length of about 120 ba...