Below is an excerpt from a weekly column called “A Scientific View” written by Hedge Plus owner Patrick Hayes. In this column dated May 6, 2019 Patrick talks about the differences in leverage between sold options and futures positions and why he prefers the staying power of sold options.
I like sold puts instead of a long futures because I can hedge the leverage. Let’s take a look. On Friday’s close, I could have gone long a September futures at $3.77 ¾, or I could have sold a September $4.20 put $.49 ¾. On a rally to $4.20, at expiration (8-23) the futures position would be up $.42 ¼. My sold put would have made $.49 ¾. That is $375 real dollars more. That would cut the leverage for a September corn contract by $375 or instead of leverage of 26.98 to 1 you would have leverage of 17.56 to 1. A 17 to 1 ratio is still crazy leverage and still allows for fantastic returns, while also giving you some room to be wrong.
With a futures contract, you will lose or make penny for penny. So if you bought 10 September corn futures at say $3.80 and the futures price moved just $.10 lower, if your account started with a $7000 balance, your new account value would be $2000.00. Wow! In this example a common $.10 move would cut your investment by 71.42857%. That’s what leverage can do and that is why I prefer to use options.
In the case above, the sold option would have lost less on a $.10 move. Because of less loss in the option position and lower initial margin requirements for a sold put, you would have a higher account balance and, thus, a smaller margin call. In other words, more staying power.