Using Options As a Secondary Stop Loss
The second way to use a protective option is in conjunction with a stop. The closer an option is to its underlying asset, the more expensive it will be. It stands to reason that an option placed at a 2 percent loss threshold will be more expensive than an option placed at a 10 percent loss threshold. Whether because of account size, number of contracts placed on the trade, feeling a premium is too expensive, or simply looking for a way to stagger your trades, having a stop loss order in the first position and a protective option as a secondary stop loss can be an advantage.Myths of Trading
There are many trading myths that affect both novice and experienced traders. Typically, these myths force traders into a narrow belief that they have to be perfect or nearly perfect in order to succeed. This myth, along with a few others, holds traders back from achieving their true mission-making profits.Limitations of Stop Loss Order
Stop loss orders are simply a tool. There is nothing wrong with them when used properly and with the proper expectations. When a trader works within the confines of the ability of a stop, then the frustration of stop orders can be diminished. The simple fact is that when you know what to expect you can’t be disappointed.
No matter how great the benefits are, when it comes to trading synthetic options there are still some drawbacks. The first drawback is the fact that it is capital intensive. The option must be purchased up front and the margin or cash for the position must be put in place. This means that you essentially have two trading positions at the same time.Synthetic Option Versus Standard Option
Synthetic options come in one of two flavors, synthetic calls or synthetic puts. They each are designed to simulate a standard call or put option without the drawbacks. A synthetic call is simple to initiate. A long position is first established in a spot forex market, futures market, or stock market; then an at-the-money put is purchased to protect the long position against any downside risk. A synthetic put requires that a short position be initiated first and an at-the-money call is purchased to protect the short position from any sudden moves to the long side. They are one of the most underused risk management tools available.