Hedging Futures with LEAPS

[superdoug3]

Newbie question -
There is a thread in Futures forum discussing the possibility of using 'out of the money' Option to insure against unlimited losses on a Futures contract. Basically, buying an 'out of the money' Put as insurance against losing a huge amount in the advent that a contract went against the trader and he was unable to sell his contract.
I was reading about LEAPS and this sounded like what was needed. But
1. if the Futures contract was in index funds like NYSE, Nasdaq, Dow (i.e. ES, NQ, YM) would purchasing a Put on a NYSE index LEAPS provide this insurance.
2. for Commodities, my guess is that you would have to match the Put LEAPS with the Futures contract. i.e Put LEAPS on Wheat for a Futures contract in Wheat etc.
3. if this is a valid idea, I guess I go to CBOE to get quotes to see how much this insurance would cost.

 

[arabianights]

There's no sense in using a LEAP really, just use the exchange traded option on the index, and roll it if you roll the future.

HOWEVER bare in mind put call parity. If you go long a future, and then buy a put to protect it, that's no different to buying a call at the strike of a put (except more commission!)

 

[superdoug3]

HOWEVER bare in mind put call parity. If you go long a future, and then buy a put to protect it, that's no different to buying a call at the strike of a put (except more commission!)

Excuse my ignorance, that is why I posted in Options Forum as you guys are the experts. 'buying a call at the strike price of a put' For example, if the stock (or index) is $4 today and I buy a LONG future contract and I want to protect unlimited loss by a put at $2, you say I should buy a call at $2. Is this even possible? This strategy save me commission ?

 

[arabianights]

I'm saying a long plus a put is PRECISELY the same as buying a call.

google "put call parity"

 

[etem_tezcan]

Excuse my ignorance, that is why I posted in Options Forum as you guys are the experts. 'buying a call at the strike price of a put' For example, if the stock (or index) is $4 today and I buy a LONG future contract and I want to protect unlimited loss by a put at $2, you say I should buy a call at $2. Is this even possible? This strategy save me commission ?

being long a future and owning a 2 put is equivalent to owning a 2 call.
you have enourmous profit potential if it goes over 4 and your maximum loss is 2 (difference between price at which you went long(4) and strike price of put which is 2).
however deep in the money options (as in your case hypothetical 2 call) have enormous bid/ask spreads. that's why in my humble opinion going long a future and buying a out-of-money put is preferable.

However professional option speculators prefer more complicated strategies such as verticals, collars, butterflies, condors etc. There is a vast literature there.
Regards,