Delta hedging options wiht Futures..some text

[cdcaveman]

just curiuos.. i was reading some stuff in the latest Stocks and Commodities mag and i've been thinking about it lately as well.. being as it that certain instruments "futures" have more leverage... you can sell higher number of contracts relative to the actual amount needed out of your account to hedge.. if you follow... page 64 in sept issue.. instead of using the actual underlying in which you only get .50 margin on.. you could say buy 100 calls on the s&p with a delta of .50 you could then short 50 futures contracts... so say thats long vol.. but you could short vol as well in the same respect...
so my question is...

Does anyone have experience with delta hedging with futures? i wanna figure out a way to dynamically hedge options with futures such that i can better use leverage to sell premium.. that or gamma scalp..

 

[cdcaveman]

there has to be someone that does this??????

 

[cdcaveman]

Delta Hedging using Futures
In practice, hedging is often carried out using a position in futures rather than one in the underlying cash asset. Mathematically, under the no-arbitrage argument, it can be shown that e(r¡d)t futures contracts have the same sensitivity to stock price movements as one cash
contract.

 

[quatron]

ATM Calls delta hedged with futures are synthetic straddles. So you might consider trading straddles instead.

 

[2rosy]

Quote from cdcaveman:



Does anyone have experience with delta hedging with futures? i wanna figure out a way to dynamically hedge options with futures such that i can better use leverage to sell premium.. that or gamma scalp..

its pretty hard to scalp gamma when you're short premium

 

[sle]

Quote from 2rosy:

its pretty hard to scalp gamma when you're short premium

I think a better way of putting it is "it's pretty easy to get scalped by gamma when you are short premium"

 

[dmo]

CDcaveman, maybe the lack of response is because it's unclear what the question is. Hedging options on futures with the underlying futures is pretty straightforward. What is it you'd like to know?

 

[marameo]

Quote from quatron:

ATM Calls delta hedged with futures are synthetic straddles. So you might consider trading straddles instead.

I understand that trading long straddles involves buying both calls and puts so major time decay to suffer as well as major vega exposure, am I correct?

Calls/Puts delta hedged with futures looks more like a vol.arb to me.

Yet, sometimes there are not long term futures listed on the exchange, for instance, dec14 futures; in that case the only way is to play a dec14 regular straddle.

 

[cdcaveman]

Quote from sle:

I think a better way of putting it is "it's pretty easy to get scalped by gamma when you are short premium"

yeah.. these are all things that pertain to getting your deltas from the outright underlying as well.. great insight guys!

 

[quatron]

Quote from marameo:

I understand that trading long straddles involves buying both calls and puts so major time decay to suffer as well as major vega exposure, am I correct?

Yes but delta-hedged calls (or puts) have the same exposure as delta neutral straddles.

Quote from marameo:

Yet, sometimes there are not long term futures listed on the exchange, for instance, dec14 futures; in that case the only way is to play a dec14 regular straddle.

You can use whatever futures available, just take future dividends into account. If the underlying does not pay dividends it's safe to use any futures, I doubt a change in interest rates will hurt you.