Options Corner
Another way to use Daily options is in fact to generate extra income/reduce the cost of an underlying long/ short position. Let’s look at a possible application of the strategy at present (time of writing FTSE 5500) but with an underlying short position. You might take the view that the FTSE is modestly oversold but that the trend is now down in looking at the current chart (see below).
60 | www.financial-spread-betting.com | June 2012
So, you open a short position on the FTSE at 5600 and that you intend to run over the next few weeks as we enter the usual summer moribund period, and your expectations for the market to fall hopefully play out. Now, on a particular day, let’s say that the FTSE falls materially to say 5400 and you are sitting on a nice profit of 200 points but you are concerned that the market is potentially due a short term reactive move to the upside. You do not want to come out of the underlying short position only to see the market drop further again and of course, on the other hand, you cannot see into the future and be sure a reactive move is definitely coming to the upside.