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OPTIONS
Prepared by
Ira Epstein & Company
Three Little-Known Option Tips
Once upon a time, it was a really volatile day in the grain futures markets. As a matter of fact, they were all momentarily limit up after a surprising crop production report. There we were, up to our knees in hand grenade pins...when a broker behind me (with twenty-five years experience) asked “Are there limits on options?” He really didn't know, but he was smart enough to realize that if he was temporarily trapped in some futures positions, perhaps he could help manage risk exposure by using options.
There are limits on options, but they are reached even more rarely than futures limits, because option prices normally move much more slowly than futures prices (this is called delta.) If futures prices have made a limit move and option prices move more slowly than futures, it stands to reason that option limits (which are normally the same as futures limits) rarely come into play. Options can be an important risk management tool in limit or highly volatile markets.
I'm also often asked: “can you put stops on options?” The answer is an emphatic “yes!” Fill quality tends to be somewhat poor when using stops on options but it can be done if you are especially risk-averse.
The third “tip” isn't so much a tip, as it is a little-known fact of option life but I've already written the title, so here goes.
A customer asked me yesterday if there were mini contracts on coffee because the margin on coffee is $15,000 and he didn't want to commit that much to a coffee position. My answer was no, there is no mini-contract on coffee, but with options, positions can be created that behave very much like half-size contacts–or third-sized–or any size desired. If you want a slower, risk-managed position that almost completely eliminates the volatility of a futures contract I can show you how to build one using the flexibility of options.
October 21, 1997Tim Zurick
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
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