Hedging short options

J

just21

I don't know if this should be in the options section as my trading plan may be flawed. My trading plans says I should hedge my short options when the market hits the strike price. If the market then reverses i am going to lose but may lose less than taking a loss on the short options. I am having trouble following the plan when I have a larger position on. When I have had a smaller position on I have not been worried and a lot of the time the market rallies and the options expire worthless or I take delivery of the futures. When I have a larger position on I am taking big losses because I can't pull the trigger to sell or buy a lot of futures to hedge. Any ideas?

Any other ideas for how to hedge short options?

Thanks
 
This sounds like a credit spread or half of an iron condor.

Why not come up with some rules based on delta where you roll the short further OTM. Then when the new short expires you'll have covered some or all of the loss on the old short.

I personally wouldn't let price get that close (i.e. touching) to my shorts in a credit spread or IC.
 
Quote from just21:

I don't know if this should be in the options section as my trading plan may be flawed. My trading plans says I should hedge my short options when the market hits the strike price. If the market then reverses i am going to lose but may lose less than taking a loss on the short options. I am having trouble following the plan when I have a larger position on. When I have had a smaller position on I have not been worried and a lot of the time the market rallies and the options expire worthless or I take delivery of the futures. When I have a larger position on I am taking big losses because I can't pull the trigger to sell or buy a lot of futures to hedge. Any ideas?

Any other ideas for how to hedge short options?

Thanks
More...

I am a fairly new trader as well, but for what it's worth I take action when the price reaches the expiration breakeven point. If my opinion on the underlying is unchanged, then I will close the position or roll out the short options. If my opinion on the underlying has changed, then I might instead convert the spread into a different one trying to keep some of the same options to reduce commissions. E.g. if I have a short put spread and the underlying drops through the breakeven point and I turn bearish, then I might buy back the current short put and write a new one below my long one, turning it into a long put spread.

If you have a hard time sticking to your plan because of your position size, then your position is too large and you should trade smaller.

As far as hedging, it sounds like you might be writing naked options? I would suggest not doing that and instead always buying long options as a hedge so that your max loss is capped.
 
Quote from just21:
----my trading plan may be flawed.
----I should hedge....
----If the market then reverses....
----I am having trouble following the plan....
----When I have had a smaller position on....
----When I have a larger position on.....
----big losses....
----can't pull the trigger....
----Any ideas?
More...
1) Your trading "plan" is BADLY flawed. You lack a well-defined exit strategy. :eek:
2) You seem to be afflicted by perfectionism. You want each trade to be a winner but you're stubborn about taking realized losses. :(
3) Positions initiated as outrights should be offset as outrights. To 'leg into" spreads in order to "sidestep" losses is amateurish & douchey, and destined for additional losses. :mad:
 
if your new.. make sure every position you put on is of a completely boring size.. if you can't get there with the particular spread.. don't trade it.. half of getting anywhere is surviving being new..

oh and don't sell wings.. just a rule of thumb... its very hard to hedge wings as your gamma changes so quickly.. generally its just a bad idea to sell wings.. sure if your selling wings in a 50 vix environment on something that is way over sold.. great.. but i can bet your not..
 
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