Pipanator did you peruse this? I've been trailing using options over stop losses in the futures market with some success but not yet explored the possibility on the spot market.
I looked in to it a little then asked a professional trader about spot hedging with options. He advised that its not worth it. I thought maybe I can trade a security then have an exotic option like a KO right under the stop or something.. or a DNT while breakout trading. The most profitable scenario I came up with was to buy and sell big when you're right on the market. No hedges.
Interesting, although the premiums can be quite high for ATM options... I would of thought this gives you greater flexibility in the event of price unexpectedly going against you to then reverse back in your favour (with a SL you can't do this). Because your risk (premium) is determined up front the options hedge sounded like a safer and more forgiving protective measure.
My only worry with this approach is viability the winding down of both positions including exercising the option at the same time as closing the net long/short position (in the scenario where you need to use the option)... surely any difference between these at the point of close would set the hedge off slightly and occur a further cost on top of commissions.
