Equity Options vs Futures Options

S

sovdefaulted

Hi traders!

Is there a better way to hedge an imaginary 1mm portfolio?

Let's say that my portfolio behaves like the market so (beta=1)
1)I could buy sep11@125 puts for 0.94 premium (spy 131.52)
2)Or I could do it via options on ES-sep. (1309,75) 125000 premium 20.25.


1) I would pay 1mm/125*0.94 = 7520
2) I would pay 1mm/(50*1309,75)*20.25*50= ~15000

I know there must be an error in the data I copied from cmegroup website and google finance.

Is there any best (cheapest) way to hedge a portfolio?

Thanks!
 
Quote from sovdefaulted:

Hi traders!

Is there a better way to hedge an imaginary 1mm portfolio?

Let's say that my portfolio behaves like the market so (beta=1)
1)I could buy sep11@125 puts for 0.94 premium (spy 131.52)
2)Or I could do it via options on ES-sep. (1309,75) 125000 premium 20.25.


1) I would pay 1mm/125*0.94 = 7520
2) I would pay 1mm/(50*1309,75)*20.25*50= ~15000

I know there must be an error in the data I copied from cmegroup website and google finance.

Is there any best (cheapest) way to hedge a portfolio?

Thanks!
More...

You can use financial futures and options on them to hedge an equity portfolio, but remember, you get no margin relief. So, when you get a profit in one, you can get a margin call in the other. This is not a good idea for small or leveraged accounts.
 
Quote from sovdefaulted:

Hi traders!

Is there a better way to hedge an imaginary 1mm portfolio?

Let's say that my portfolio behaves like the market so (beta=1)
1)I could buy sep11@125 puts for 0.94 premium (spy 131.52)
2)Or I could do it via options on ES-sep. (1309,75) 125000 premium 20.25.


1) I would pay 1mm/125*0.94 = 7520
2) I would pay 1mm/(50*1309,75)*20.25*50= ~15000

I know there must be an error in the data I copied from cmegroup website and google finance.

Is there any best (cheapest) way to hedge a portfolio?

Thanks!
More...

Your SPY put option prices are wrong. SPY Sep 125 put closed at 2.27 bid @ 2.32 yesterday, which is basically inline with the ES Sep 1250 put, which is currently 21 bid @ 23.

Your total cost (excl. commissions) should be about the same irrespective of which underlying you use.

However, given that SPY is smaller, you need more contracts to hedge 1 mil, hence your commissions are gonna be higher with SPY options compared to ES options. You can also use SPX index options, which are $100 per point and thus you need even less contracts to hedge 1 mil.

Generally, there is no single best (cheapest) way to hedge. The suitability and the cost depend on how much protection you want and what you are willing to give up on the upside.
 
Quote from FrankSlaughtery:

have you considered spx options? they're moving to c2 later this year if the goalposts don't keep being moved by the regulators.
More...

I didn't know about them I will take a look, thanks.
 
Thanks for your reply.

I knew at the time of posting that the prices were wrong the pricing excluding commissions should be the same otherwise somebody would be able to arbitrage.

I will take a look on SPX options.

Thanks again.


Quote from MTE:

Your SPY put option prices are wrong. SPY Sep 125 put closed at 2.27 bid @ 2.32 yesterday, which is basically inline with the ES Sep 1250 put, which is currently 21 bid @ 23.

Your total cost (excl. commissions) should be about the same irrespective of which underlying you use.

However, given that SPY is smaller, you need more contracts to hedge 1 mil, hence your commissions are gonna be higher with SPY options compared to ES options. You can also use SPX index options, which are $100 per point and thus you need even less contracts to hedge 1 mil.

Generally, there is no single best (cheapest) way to hedge. The suitability and the cost depend on how much protection you want and what you are willing to give up on the upside.
More...
 
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