Ask a Broker

August 2004

Q: It seems like every time I take a position in the market, prematurely, I get stopped out before the market makes its move. What can I do? -Frustrated Customer.

LindPlus Senior Market Strategist Burt Schlichter answers:

A: In my 10 years of trading experience I have heard and witnessed your frustration. My advice: use options as an alternative to a stop loss. This type of trading strategy can offer practically unlimited profit potential with limited risk. The strategy is simple: First, decide on what side of the market you wish to be on, bullish or bearish. Second, determine your entry point. Once your entry point is in place, simultaneously buy a call or put option. You're going to choose a strike price that is just “in the money;” this will act as your protection (stop loss). If you're going to go short the market, you would buy a call option to act as the stop. If you're going to go long the market, you would buy a put option to act as the stop. Your maximum risk will be determined by your entry price (EP) minus your strike price (SP) plus the option premium (OP)- that's it.

Using (08/12/04) Dec. Corn(CZ4) Settlement prices: “Bullish Scenario”

Example:	1. Entry point is 229.0 (CZ4)
	2. Strike price (“in the money”): Dec. Corn 230/put@ 10 ½($525)
	3. Max. Risk= {(EP)- (SP)}+ (OP) (229.0-230.0)+ 10 ½
	Total risk= 9 ½ cents or $475.

So, if the corn market plunged to ZERO your total risk would be $475(excluding commissions & fees) and the profit potential is still practically unlimited. Using option strategies as an alternative to stop losses can keep you in the market longer.

Options strategies can involve a high degree of risk and may not be suitable for the novice investor. Buying an option involves a clearly defined risk; you pay for the premium and the commission and the worst that can happen is the option goes to zero and you lose your initial investment. When you sell an option, the option can potentially go against you an infinite amount and your losses can be severe. Please consult with a professional advisor before employing this strategy.

Burt Schlichter is a Senior Market Strategist with Lind Plus. To learn more about this strategy and others, he can be reached at 1-800-643-4455.

Kristina Zurla Landgraf is editor of LindForum. She can be reached at editor@lind-waldock.com. To submit a question for Ask A Broker, write to the editor at that address.

Futures trading involves risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2004 Lind-Waldock, A Division of Man Financial Inc. All Rights Reserved. Futures Trading Involves Risk of Loss.