Hoe to close fut position with fut option

Discussion in 'Commodity Futures' started by toorik, Jan 19, 2008.

  1. toorik



    Lets say I´m long 1 contract of mar wheat. The market moves limit down on me and I cant get out.

    So how do I get out or hedge my position with futures options. I dont know anything about futures options so if someone could explain it real simple and maybe bring an example or something.

    I´m not stuck or anything, just want ro be ready if that should happen.

    thanks in advance!

  2. If you buy a put, and sell a call with the same strike price, you are synthetically short the futures.

    +1 Futures + 1 put -1 Call = Conversion (a pretty much risk free position equivalent to flat)

  3. toorik


    thanks for that.
  4. It would be prudent to do a little more than discuss the matter on a website.

    You happened to obtain good advice as to how to put on a synthetic short, now you should do the rest of your homework.

    Check out how prices of options change as markets lock limit. Ask someone who knows the particular market you are going to trade. Also check the actual logistics. If you were to put on a position and then market locks, what is your "fire drill" going to be like. You should practice exactly what you will do down to the actual order process.

    If you take the time and trouble to do these things, one thing will become clear....IF you have to put on a synthetic to clear the decks, in the process you are going to take a "synthetic" reaming from the market makers. It might be your first day on the block, but it isn't theirs. Get an idea of what it will cost upfront....so you can make an informed decision.

    There is one last thing to know. Usually what happens is you think you have a plan, and then when it happens, you are "unable"....this is a term that is used all the time on the floors. Means that you want to put on a position but you are not able to get it done for a variety of reasons. For example, there isn't a market at the price you want to trade. Or the markets are closed when you need to hedge. Or you try to put on the postion but you can't get filled (cause you weren't willing to pay up)...It all seems to happen just when you need to get flat....

    You may not like to hear that but that is reality....at least that is reality for many of us who try to act in these markets....I welcome comments from anyone who finds it different.....I am never too proud to learn something new....

    Just trying to keep it real so to speak.

  5. (1) You can consider doing a "synthetic futures" via the options. (2) You could trade the spot-month futures when it's in delivery because it trades with no price limit.
    (3) With wheat, you could try to trade Kansas City, Minneapolis and/or the 1,000-bushel contract against Chicago.
    (4) You could trade another correlated market such as corn or soybeans as a surrogate "hedge".
    (5) If a futures is approaching a limit and you're leaning in the wrong direction, get out before it gets there.
  6. Just reviewed the title of this thread again...

    I think calling yourself a "hoe" is kind of harsh....Ease up on yourself there miss, or missus, its just a lock market, it aint the end of the world....
  7. toorik



    well, if market locks you in, then you are as good as hoe to the market...

    and if you are smart enough hoe, then you will use protection :)