Options on Futures

If someone with success would offer some guidance as to whether or not options on the ES would be worth trading or if straight futures would be the better route, I'd appreciate the help.

Thanks

 

It's all about what you want to do. I would advise though, that margining on futures options is not easily explained. There are a lot of hidden gotchas. Take a look at 'SPAN Margining'

Bottom line, futures options margining is totally different than stock options.

 

Start with futures first. Then consider getting involved with options.

 

StockApprentice

Define gotchas for me if you don't mind.


Also, why start with futures where unlimited risk is when FoO offers limited risk?

Thanks

 

I strongly suggest NOT going for the futures trading directly. It is very rewarding if you are right, but definitely very risky if you are not. As with futures you get high leverage compared to stocks.

If you trade spreads or buy straight options, there is no need to worry about the SPAN margin.

If you are going to sell naked options, the SPAN calculation will matter as margin will keep on changing day by day. You need to keep enough reserve for the changes.

I am sure you meant to say OoF (not FoO)!

 

Haha yes indeed, OoF. I would not be writing just buying.

 

Futures have unlimited risk to the upside only if you let a short-position wipe you out completely. Theoretically, futures have limited downside risk, except Eurodollar futures, which occurs at "zero". Options on futures can behave differently than futures but they require a different mentality to trade profitably than futures. You are slightly better off developing respect for the market by trading futures first, then getting involved with options later.

 

Two different games entirely. If you're interested in playing the direction of the futures, play the futures. It takes a fair amount of knowledge in options to understand the additional dimensions of implied volatility, gammas and time that options bring to the table. I wouldn't risk (a lot of) real money before you feel comfortable with those.

 

Options on futures are best used for hedging a futures position where you have a nice profit and want to keep it. There are situations where, if done right, you can have a "free" long or short position.
Jeff

 

agreed, great way to protect profits. Its all about breaking down what makes sense. If vol is at its lows and you can buy a lot of time for cheap
example: On Oct 19, 2007 I bought SBV8 12.00C options with over 300 days of time for 27 ticks, no brainer right? Well, trading options requires constantly scanning different markets for opportunites that you may seem overvalued to sell, or undervalued to buy.

As the options increase in value you can collect profits on a percentage u own, but either way your risk is limited to the 27 ticks paid. Needless to say, they didnt move for a few months, then jumped to over 400 ticks at one point. The beauty is the cheap time value (theta) that still exists.

Hope this helps