Do *you* hedge against a total *intraday* market crash?

[OldTrader]

Quote from giggollo:

Does anyone here hedge against a total intraday market crash a la 1987. If so, how do you hedge? If not, whats your logic in not hedging, and especially if you are using leverage?

Makes no sense to "hedge" an "intraday market crash" routinely. To keep the premium small you have to be too far out of the money to have it serve as an effective intraday hedge. The market can move a long ways down without any movement in a far out of the money put. Move the hedge too close to the money and the premium is too high when the "crash" does not take place.

The trading habits you learn today are the habits you will have in place the day a serious "crash" unfolds. If you are learning the habit of fading the market, you will be long as it heads down.

I have been an active trader of S&P futures, and later ES futures since the contract began back in the early 80's. I have never known a single person who "hedged" intraday risk.

By the way, I note a few of you who hedge who are hedging OVERNIGHT risk. That a whole different subject. The question here was INTRADAY risk.

OldTRader

 

[Buy1Sell2]

Quote from Pekelo:

There were 3 50 points gaps in January for YM futures.(for ES that would be 4-5 points), and lots of smaller ones. For gap reference see my journal called MR statistics in the Strategy trading section...

There were gaps from the overnight trade or from regular market close to regular market open?

 

[Pekelo]

From regular market close to regular market open. Otherwise because of the continuos futures trading, there is no really gap....

 

[ilganzo]

Quote from OldTrader:

Makes no sense to "hedge" an "intraday market crash" routinely. To keep the premium small you have to be too far out of the money to have it serve as an effective intraday hedge. The market can move a long ways down without any movement in a far out of the money put. Move the hedge too close to the money and the premium is too high when the "crash" does not take place.
...
I have been an active trader of S&P futures, and later ES futures since the contract began back in the early 80's. I have never known a single person who "hedged" intraday risk.

Although I agree that if you're carrying a "scalp" position your time risk is limited, there are market neutral strategies out there that hedge their delta in real-time for long-short portfolios carrying multiple stock positions. Those strategies buy/sell future contracts everytime the long or short offset grows a certain amount of beta*size.

Would you say it makes no sense to hedge an intraday market move in that case?

 

[Buy1Sell2]

Quote from Pekelo:

From regular market close to regular market open. Otherwise because of the continuos futures trading, there is no really gap....

yes I agree--that was the intent of my original post

 

[OldTrader]

Quote from ilganzo:

Although I agree that if you're carrying a "scalp" position your time risk is limited, there are market neutral strategies out there that hedge their delta in real-time for long-short portfolios carrying multiple stock positions. Those strategies buy/sell future contracts everytime the long or short offset grows a certain amount of beta*size.

Would you say it makes no sense to hedge an intraday market move in that case?

Right, the market neutral type strategies make sense because in theory a small move down creating a loss on one side of the position is offset by a profit on the other side.

A guy buying "crash insurance" intraday is not creating a delta neutral type of strategy. He's too far out of the money in his options so that the option doesn't detract from his upside.

Good point though. If any of these crash protection type ideas are actually just delta neutral type strategies masquerading under a different name, I take it all back. But I'm assuming that is not the case.

OldTrader

 

[giggollo]

Quote from OldTrader:

.........

The market can move a long ways down without any movement in a far out of the money put.

.............
OldTRader

If you buy some puts a few levels out of the money (yes enough so it doesnt hurt your upside) and the whole market tanks 50%, why wouldnt your put options be worth a lot, enough to offset 50% losses on your long stock positions? Im not talking about a small intraday dip, im talking about a 50% or more drop in the indices with no recovery..Can you show with an actual numerical example how such a move in the market would fail to make your puts *skyrocket* in value?

 

[fader]

Quote from giggollo:

If you buy some puts a few levels out of the money (yes enough so it doesnt hurt your upside) and the whole market tanks 50%, why wouldnt your put options be worth a lot, enough to offset 50% losses on your long stock positions? Im not talking about a small intraday dip, im talking about a 50% or more drop in the indices with no recovery..Can you show with an actual numerical example how such a move in the market would fail to make your puts *skyrocket* in value?

you will have to look at a black scholes type option pricing model - look at the vix/vxo spikes in 1987, 1998, 2001, 2002 - look at the corresponding percentage change in the index - create model scenarios / monte carlo for a future event - use the outputs from these scenarios to get your option values and underlying index values... - add in a fudge factor, i.e. the actual event may be worse than ever before - also add liquidity risk, e.g. your broker may go bust, there may be no liquid market for your options... - it's likely there are other issues i am not thinking of immediately.. - all the best.

 

[murray t turtle]

Quote from OldTrader:

Makes no sense to "hedge" an "intraday market crash" routinely. To keep the premium small you have to be too far out of the money to have it serve as an effective intraday hedge. The market can move a long ways down without any movement in a far out of the money put. Move the hedge too close to the money and the premium is too high when the "crash" does not take place.

The trading habits you learn today are the habits you will have in place the day a serious "crash" unfolds. If you are learning the habit of fading the market, you will be long as it heads down.

I have been an active trader of S&P futures, and later ES futures since the contract began back in the early 80's. I have never known a single person who "hedged" intraday risk.


OldTRader

=========
Thanks Old trader, good old spice to discussion.

 

[murray t turtle]

Quote from steve46:

Urban myth.

In my opinion you either have a testable viable edge or you do not. A psychologically healthy person would not trade without it for the same reason you wouldn't repeatedly hit yourself on the head with a hammer.

Steve

============
RE; Hedge & edge

Steve46;
Excellant edge comment ,
& I am also including your derivative comment [ Russ2k opening price related ] on ;
Market Makers Edge, by Joshua Lukeman.
His work is more edge than hedge.

That Market Makers Edge comment was made in last 50 days or so.