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the market work for him. Of course, this is not exactly fair, since the option cost $10.60, while he only risks $3. |
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The point of all this discussion is that buying an in-the-money option is often better than using futures. You probably will not have to pay too much above intrinsic value. You can avoid using a stop. Just think of all the trades you have made where you got stopped out and then the market went in your favor. |
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The following is a hypothetical illustration: |
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October gold closed today (September 9) at $285.10. October 285 gold puts closed at $1.50. |
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Buy five October gold futures, and buy ten October 285 gold puts. (For simplification in the math, let's pretend that we have bought the five futures for $285.00.) The ten puts cost $15.00 each, for a total of $150. Except for commissions, this is the maximum risk on this strategy. |
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Scenario 1: October gold goes up. |
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At 286, sell one contract. Profit on this contract is $1.00 |
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At 287, sell one contract. Profit on this contract is $2.00 |
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At 288, sell one contract. Profit on this contract is $3.00 |
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At 289, sell one contract. Profit on this contract is $4.00 |
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At 290, sell one contract. Profit on this contract is $5.00 |
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Total received $15.00 |
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Scenario 2: Gold goes down. |
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At 284, buy one contract. Profit on this contract is $1.00 |
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At 283, buy one contract. Profit on this contract is $2.00 |
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At 282, buy one contract. Profit on this contract is $3.00 |
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At 281, buy one contract. Profit on this contract is $4.00 |
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At 280, buy one contract. Profit on this contract is $5.00 |
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Total received $15.00 |
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