CL Redux

[schizo]

Quote from schizo:

::ANNOUNCEMENT::

Do any of you actively hedge? I would like to throw a brainstorm session on many ways one can hedge a position. If this sounds appealing, please stick around after the close of pit session.

Okay, first I must admit I ain't no hedger. I've always been a straight shooter, viz. directional play. But I believe hedging shouldn't be overlooked especially when the market is so damn choppy as it is now.

First, what methods can be used to hedge? Options? Pair trade (eg. ES and NQ or CL and QM)?

Please chime in as you see fit.

 

[schizo]

Quote from jones247:

I'm glad to hear about your inquiry on hedging... I posed a similar question to the group a few weeks ago, but since no one responded, I assumed that there was no interest.

I'm currently testing a few hedging strategies with options; however, the bid/ask spread is KILLING me...

Walt

Although I'm not an options guy, I have used options a few times in the past with very mixed result. The spread is horrible and when you enter limit order it just sits there even though the underlying is moving without you.

These days, if I feel the heat, I just hit the bid/ask for QM. (1CL = 2QM)

 

[jones247]

Calendar Spreads (i.e. May CL with Sept CL) offer reasonable bid/ask spreads; however, they hardly move... Most folks who trade CL are looking for action. Horizontal (Time) Spreads on CL futures is often like watching paint dry...

This is why I've migrated to CL options. I suppose that a major reason by CL options have such wide bid/ask spreads, especially on the back months, is beacause there's not a lot of liquidity. Hopefully, liquidity will increase substantially (especially in the out months) over the next year or so.

Walt

 

[jones247]

The problem with using QM is that it doesn't allow me to take advantage of the dynamics associated with options. For example, there are some hedging strategies with options that profit due to the movement of the greeks (theta, delta, gamma, vega). Those advantages would be lost with QM as a hedge for CL.

Walt

Quote from schizo:

Although I'm not an options guy, I have used options a few times in the past with very mixed result. The spread is horrible and when you enter limit order it just sits there even though the underlying is moving without you.

These days, if I feel the heat, I just hit the bid/ask for QM. (1CL = 2QM)

 

[NoDoji]

Quote from riskaddict:

Is anyone else thinking about going long at 97.30 if we get there? I not sure if it's smart or if I'm just pissed about not letting that short run for another 50 ticks.

No only thought about it, actually did it @ .32 off the double touch to .27, mainly because I shorted earlier @ 98.80, covered @ 98.04 off the rebound from just below the round number because a) it was in my target zone and b) FOMC on the way, and then was amazingly pissed I didn't hold the position, so I decided there was a long coming at some point

I left half the bounce on the table, though, only took .20 off it.

Love this volatility. I'm on my way to becoming the Guild Master of the 1-Min Early Entry Signal.

 

[GammaTheta]

We're required to hedge any long term spec position in futures. However, most of the positions we take are at least a 12month outlook. Hedging makes more sense at this time frame. Being in and out of positions causes hedging to be far too expensive and we don't do it on positions with shorter views.

We accomplish our goal trading various points on the curve as well as longer dated options, both OTM & ITM. You can also reduce the cost of the hedge by strategically writing options against your underlying. This can and does come back to bight you from time to time. We can hedge most of our long term positions at a cost of somewhere around 5%/year, although, many times we've reduced the cost of our hedges to break even over the life of the trade.

 

[schizo]

Quote from jones247:

The problem with using QM is that it doesn't allow me to take advantage of the dynamics associated with options. For example, there are some hedging strategies with options that profit due to the movement of the greeks (theta, delta, gamma, vega). Those advantages would be lost with QM as a hedge for CL.

Walt

I agree. But since my main concern is to "hedge" the underlying position rather than to profit from the hedge itself, I opt for whatever that's simple as possible.

BTW are you a daytrader or swinger?

 

[schizo]

Quote from GammaTheta:

We're required to hedge any long term spec position in futures. However, most of the positions we take are at least a 12month outlook. Hedging makes more sense at this time frame. Being in and out of positions causes hedging to be far too expensive and we don't do it on positions with shorter views.

We accomplish our goal trading various points on the curve as well as longer dated options, both OTM & ITM. You can also reduce the cost of the hedge by strategically writing options against your underlying. This can and does come back to bight you from time to time. We can hedge most of our long term positions at a cost of somewhere around 5%/year, although, many times we've reduced the cost of our hedges to break even over the life of the trade.

So option is not viable as a hedge for day traders? But considering so many options traders who dabble in and out successfully on an intraday basis leads me to believe that it can work although it has never worked for me personally.

 

[jones247]

I daytrade and swing trade...

 

[riskaddict]

As Jones mentioned the spread on CL options makes them very cumbersome especially when there is overnight action and you want to make adjustments to your exposure. What i have been doing lately and use to do a lot in 2008 is to use the QM on a 1 min basis within a multi-day, muti-contract CL trade. Like when oil is at 105 and you know it's only fear and stupidity based you go short big time and you don't even want to touch it for a week. During that time you know at least a couple times a day there will be long opportunities so why not get less short or maybe even neutral if something is glaringly obvious. If the "insurance trade" goes against you treat it like a normal trade this way you are taking a loss and your are actually happy about it!

As far a CL options go I only use them for volatility plays like straddles or strangles in fact I do place these trades in a different account so they don't mess with my head.

I think in the last year we all learned pairs trading a completely different instrument based on some correlation that happens to work in the short run can be a very frustrating game and now when I hear someone on cnbc mention something like this I know I will be taking their money.

The most important thing to remember with any of this insurance type stuff is that you still have to have a stop for that core position, hopefully smart hedging along the way will just make that stop less painful if it happens.