Global Macro Trading Using Options
While the classic global macro trader does directional trades with the outright instrument many are resorting to using options as their primary vehicle to trade stocks, bonds, commodities, and currencies. There are several reasons for this and many reasons why you may want to look into it.
One of the main reasons that global macro traders are using options more and more is because they are able to absolutely limit their risk as well as gain some cheap leverage from time to time. When you are long an option you can not lose more then the cost of the option. This is the same as with the position but the option is always cheaper then buying the outright. By using options you can use less capital to gain the same or even better returns. And again the risk is more limited.
Another aspect of options that global macro traders like is that they can easily and cheaply hedge and leverage up on out of the money low probability events. What would happen if the SP500 drops 20% in a day? Well if you are using the outright futures contract it would take a lot of capital to have that idea on. With options however you can usually buy that option for a few nickels or less. If it happens you make many multiples of that amount and if it doesn’t happen then you only lose a bit. Obviously this is not the best thing to be buying but think about it and you find other ideas that have a low probability of happening but are not impossible.
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