Hedging with puts - Confused

[nazzdack]

----basic knowledge....
----fine details about options.
----1 x atm put = full hedge of 100 x shares....
----people say you need 2 atm puts to be hedged.

1) Assuming atleast a few months of time remaining until expiration of the option and because of the approximate "50" delta of the option, the option premium will fluctuate only half as much as the stock when the stock is close to $50/share, i.e. at-the-money. Two put options will "more precisely" hedge the 100 shares of stock instead of just one put option. As time elapses, the delta will increase and also become "jumpier". In the days leading up to expiration of the option, one contract becomes sufficient to hedge as the delta approaches "100".
2) The one option versus the 100 shares is fine as long as you make no adjustments before expiration of the option or until the shares are sold. Your position is said to be static, hedged or a "married put".

 

[austinp]

I can save you from any further brain damage involved with this equation. If you are fully hedged a futures position, you are essentially net-flat. All you accomplished was paying an additional round-turn cost to freeze loss-gain potential on your futures position.

To fully hedge = to go flat. So you might as well close the futures position, reopen it later and save the options round-turn cost AND the extrinsic value loss on top of that.

**

When you read in places where some random guy claims to be "hedged off" that's nothing more than a cute way of saying "my position is flat".

There is no way on earth to fully hedge downside without giving up at least half if not most potential profits upside. Someone with 4 futures contracts partially hedged = 2 futures contracts unhedged.

The concept of trading futures and "hedging" with options is mostly myth and feel-good mantra, not applicable in real-time $$