Dow e-mini/hedging with options

R

RandomZen

Hi guys,

I am very nervous about using stops, and trying to look at options as a hedge. I know it’s been discussed here before, but I am specifically interested in hedging with cheap options, which have 5 days to expiration. And use that week for the swin-trade in the underlying.

Here’s a set of parameters that would’ve worked well on the June 09 Dow e-mini contract, see attached equity curved from backtest. Of course, it’s not really tradable because there are no stops involved. How could I have hedged with options?

PARAMETERS:

[no technical triggers here, time of entry is fixed, trade in the direction of the trend]

1 YM (June 09) contract
1 trade per day, long entry
max holding period 10 days
profit target: 50 points
no stops
time of entry: minutes 190-200 of the trading session, i.e. mid-day entry

HOW ABOUT THIS:

I only make one trade per month. I buy 1 YM contract, on Monday, the week of options expiration and set a high-probability probability profit target, for a 5-day horizon, let’s say 40-50 points on the Dow e-mini.

As insurance, I buy a near-the-money put (or debit put spread), which should be cheap because no time value left. The insurance should work because the option would have intrinsic value if it goes in the money. So I AM BUYING CHEAP CATASTROPHE INSURANCE FOR ONE WEEK, the max holding period for my trade.

Any idea if this would work?

Thanks

RandomZen
 

Attachments

hedging with options also pushes up your trading slippage. fees and commissions.

It is cheaper to use smart money management and not overdo leverage.
 
I had the same idea, I'm still trying to research the proper strategy. Trade off the daily or weekly chart and construct a delta neutral strategy.
 
It sounds clever. I've posted a similar question and somebody recommended deep out of the money options. They said the typical cost is 3% of the account per month or per what I don't really think they said.... I use stops however. My concern was more like a repeat of 9/11...

Strange and unexpected things can happen. Guys with seats on the exchange can get their orders queued up ahead of the rest of us for one thing.. stops might be useless...

Is there a book that will help us figure out our best option strategy for such applications? Anybody?
 
I recommend that you learn more about options before you trade them. This is not meant as a sarcastic remark. For instance: the underlying (in this case the dow e-mini) = the call - the put. So, when you own the U and buy a P, it is the same as buying the C at the strike of the P you would have bought (U=C-P, therefore, U+P=C ). So you could more easily just buy the call instead of the underlying and the put and get the same exposure.
A vertical spread might meet your objective more safely, but you need to learn the basics about options first so you can make these decisions yourself.
 
Quote from donahuedc:

I recommend that you learn more about options before you trade them. This is not meant as a sarcastic remark. For instance: the underlying (in this case the dow e-mini) = the call - the put. So, when you own the U and buy a P, it is the same as buying the C at the strike of the P you would have bought (U=C-P, therefore, U+P=C ). So you could more easily just buy the call instead of the underlying and the put and get the same exposure.
A vertical spread might meet your objective more safely, but you need to learn the basics about options first so you can make these decisions yourself.
More...

wait, maybe I could hedge with some middle eastern stock indexes...
 
Quote from donahuedc:

you could more easily just buy the call instead of the underlying and the put and get the same exposure.

A vertical spread might meet your objective more safely, but you need to learn the basics about options first so you can make these decisions yourself.
More...

Ok, but let me ask this:

FIVE DAYS TO OPTION EXPIRATION, what is the exact difference between:

1) long Dow e-mini contract (with a max holding horizon of 5 days, likely to hit the profit target sooner) + near the money put,

and

2) bull call spread, with a 5-day lifecycle.

Are there differences in terms of position delta, various Greek etc?
I like #1 more, but this may just be based on faith, not facts

Again, the purpose is to buy cheap insurance for a quick swing trade, not to make a directional bet using options, per se.

Feel free to shoot the idea down! It's better to be criticized than to bet hard earned dollars on ideas that don't work :D

RandomZen
 
Does anybody have a spreadsheet or formula for determining margin requirements on long futures short call or vice versa?

Example: ES at 900.00
open a long emini s&p at 900 and sell a call at 910 strike or
the equivalent position long s&p and buy a put at 890 or what ever strike or an ATM call or ATM put.

I understand a futures contract has a delta if long of +1.00 and if short of -1.00 and to fully hedge the position I would need to buy or sell two ATM calls or buy 2 ATM puts to fully cover the position.

I guess what i'm after is how do I use options instead of a stoploss to push the risk:reward level more in my favor and to provide a greater longevity in a trade that might have stopped me out and can I use options to reduce my margin in order to have the option of trading more contracts if conditions favor doing so.
 
Quote from RandomZen:


1) long Dow e-mini contract (with a max holding horizon of 5 days, likely to hit the profit target sooner) + near the money put,

This is the exact equivalent of a naked long call. I presume that if you are swing trading the underlying long e-mini, that you would also sell the put when you sell the future.

2) bull call spread, with a 5-day lifecycle.

Are there differences in terms of position delta, various Greek etc?

Yes different greeks. For instance, if the strikes are close together then the position won't be very sensitive to volatility.

I like #1 more, but this may just be based on faith, not facts

Again, the purpose is to buy cheap insurance for a quick swing trade, not to make a directional bet using options, per se.

But with the swing trade you are making a directional bet with the underlying. It doesn't make any difference to your profit or loss whether you make the directional bet with the options or the underlying.

Feel free to shoot the idea down! It's better to be criticized than to bet hard earned dollars on ideas that don't work :D

RandomZen [/B]
More...
 
donahuedc,

Ok thanks, maybe there is no secret backdoor to cheaper insurance after all :mad:

At least if all the options are trading at their theoretical values.

I guess what I'm saying is close-to-expiration-options (five or even two days) may trade below their theoretical value because people think they're finished and useless. So they are "cheap" in this sense. But I don't know what edge, if any, this would give the swing trade I'm talking about.
 
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