Hedging with options

B

billp

Can anyone help on the below matter? Thanks.

I'm thinking of holding stocks overnight (this could last from 1 day to at least a few days/weeks). But I do not like gaps (that are in the wrong direction). Is the best idea then to hedge with option? If so should it be an OTM, ITM, ATM option and for how many months expiration date? Any advise appreciated.
 
Quote from billp:

Can anyone help on the below matter? Thanks.

I'm thinking of holding stocks overnight (this could last from 1 day to at least a few days/weeks). But I do not like gaps (that are in the wrong direction). Is the best idea then to hedge with option? If so should it be an OTM, ITM, ATM option and for how many months expiration date? Any advise appreciated.
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You can check out my journal here, where advice has been given on what you're asking http://www.elitetrader.com/vb/showthread.php?s=&threadid=72117&perpage=6&pagenumber=6 there is more info on other pages

http://www.elitetrader.com/vb/showthread.php?s=&threadid=72117&perpage=6&pagenumber=15
 
Quote from billp:

Can anyone help on the below matter? Thanks.

I'm thinking of holding stocks overnight (this could last from 1 day to at least a few days/weeks). But I do not like gaps (that are in the wrong direction). Is the best idea then to hedge with option? If so should it be an OTM, ITM, ATM option and for how many months expiration date? Any advise appreciated.
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Well, you could purchase a slightly otm put with at least 3 weeks to expiry. This would turn your long stock into a synthetic long call. The strike and expiry selection really depend on how much risk you want to take and what you think the underlying will do and over how long it will take to do it (dreadful English, lol).
You could also sell an otm call (as well as buying a protective put) to partially fund the purchase of the put and thus make a collar (synthetic bull call spread).
Best
daddy's boy
 
Quote from billp:

Can anyone help on the below matter? Thanks.

I'm thinking of holding stocks overnight (this could last from 1 day to at least a few days/weeks). But I do not like gaps (that are in the wrong direction).
More...

Okay, and how are you going to know in advance whether a gap is going to be in the wrong...or right...direction, before you establish your hedge?

My experience in holding overnight for quite a few years is that trying to buy protection, especially in the form of individual equity options, is not worth the expense.

If I am heavily positioned I may sometimes short the overall market with options, but not individual stocks. It can really cap potential gains and cause you a lot of headaches.
 
Thanks folks. Will look into it. Anybody wants to contribute further are more than welcome.

Lindq,
Ahem..cough cough. Now since when did I mention that I know the direction? If I knew I wouldn't be interested in hedging right? I just mentioned I don't like gaps in the wrong direction from my long/short stock position :) I do appreciate your contribution though.



Quote from lindq:

Okay, and how are you going to know in advance whether a gap is going to be in the wrong...or right...direction, before you establish your hedge?

My experience in holding overnight for quite a few years is that trying to buy protection, especially in the form of individual equity options, is not worth the expense.

If I am heavily positioned I may sometimes short the overall market with options, but not individual stocks. It can really cap potential gains and cause you a lot of headaches.
More...
 
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