CME Event Contract usage

T

traderjo

Is anybody using CME Event Contracts for hedging purposes?

Here is one usage I thought of,, can experienced traders analyze and suggest the pitfalls/ risk rewards/ and any alternatives
Assumptions: Trader wants to go long MES
so, ( ignoring commissions)
Buy to open 1 MES ATM weekly Option on last day of expiry @ 7 points x $5 = -$35
Buy 4 x CME ATM Event Contract "NO " @ $11 x 4 = -$44

MES closes 20 points Down from Strike of option
Loss on Option = -35
Profit on EV = 4x ( 20-11) = +36
Overall = +$1 ?

MES closes 20 points UP from Strike of option
Profit on Option = (20x$5) /2 = $50 ( assuming delta is still 0.5) not sure at what point the Delta increases
Loss on EV = 4x ( 20-11) = -36
Overall = +$14?

MES closes only 1 points UP from Strike of option
Profit on Option = (1x$5) /2 = $0.5( assuming delta is still 0.5) not sure at what point the Delta increases
Loss on EV = 4x ( 20-11) = -36
Overall = -35.5?
 
That seems about right. S&P would have to move up enough to overcome the cost of the event contracts + cost of the regular option.

To me what you describe is too much transaction cost and friction for a short term trade.

The way I trade event contracts is I buy cheap OTM yes and no contracts betting on breakout either side. The PNL profile with this method isn't for everybody - most days you will lose money but the winning days will be like a lottery win (because of the extreme convexity of these instruments) and will more than compensate you for the efforts.
 
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