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How to hedge e-mini S&P exposure when systems go down?
- Thread starter InTheZone
- Start date
Quote from InTheZone:
Yes, impossible to hedge out the risk completely. At best I think you can limit the risk via a straddle to a finite amount.
How? I don't understand. Can you give me an example of a single position (straddle if you wish) that would limit the risk of all these positions to a finite amount?
1. Long 1 ES and the market moves against you.
2. Short 1 ES and the market moves against you.
3. Flat and the market moves up.
4. Flat and the market moves down.
Those are the possible situations you are attempting to hedge - you don't know which position you are in - and you say there is one single thing you can do that will limit your risk no matter which of the above 4 positions you are actually in?
How about long a front month Straddle, and short a Straddle in a back month, or vice versa? I guess which way you would go would depend on how much they pump up the IVs in the front month.
If you buy a call, and buy a put, you're risk to this position is just he premium you pay.
The long call and long put will offset any losses you may incur from a long or short futures position. If you're long the futures, the put will give you downside protection. If you're short the futures, the call will give you upside protection. No matter what the futures market does, you will not have unlimited risk.
The upside of course from the straddle, which by itself is unlimited, will now be limited.
Make sense?
-- ITZ
The long call and long put will offset any losses you may incur from a long or short futures position. If you're long the futures, the put will give you downside protection. If you're short the futures, the call will give you upside protection. No matter what the futures market does, you will not have unlimited risk.
The upside of course from the straddle, which by itself is unlimited, will now be limited.
Make sense?
-- ITZ
Quote from InTheZone:
If you buy a call, and buy a put, you're risk to this position is just he premium you pay.
The long call and long put will offset any losses you may incur from a long or short futures position. If you're long the futures, the put will give you downside protection. If you're short the futures, the call will give you upside protection. No matter what the futures market does, you will not have unlimited risk.
The upside of course from the straddle, which by itself is unlimited, will now be limited.
Make sense?
-- ITZ
Theoretically, I guess. Doesn't make much sense to me - the premium you'll be paying (and losing) will be huge. You are probably better off just taking the hit on your futures position.
The premium won't evaporate in all in day. You can recover some of it by selling the options the next day.
You'll lose at least the spread, which will be about 2 pts round trip per option contract, plus the change in volatility.
As the average range of the SP is about 12 points, it seems to me that you can lose more being unhedged, than hedged.
-- ITZ
You'll lose at least the spread, which will be about 2 pts round trip per option contract, plus the change in volatility.
As the average range of the SP is about 12 points, it seems to me that you can lose more being unhedged, than hedged.
-- ITZ
Quote from InTheZone:
If you buy a call, and buy a put, you're risk to this position is just he premium you pay.
The long call and long put will offset any losses you may incur from a long or short futures position. If you're long the futures, the put will give you downside protection. If you're short the futures, the call will give you upside protection. No matter what the futures market does, you will not have unlimited risk.
The upside of course from the straddle, which by itself is unlimited, will now be limited.
Make sense?
-- ITZ
How about selling a put and selling a call?
And, how about using bonds to hedge?
pretzel
Pretzel,
Writing options will only increase your risk profile if the S&P's move beyond your strike prices, not reduce it. Draw the payoff diagrams and you'll see what I mean.
As for bonds, the correlations to the S&P aren't that high, so you can't become delta neutral using bonds.
-- ITZ
Writing options will only increase your risk profile if the S&P's move beyond your strike prices, not reduce it. Draw the payoff diagrams and you'll see what I mean.
As for bonds, the correlations to the S&P aren't that high, so you can't become delta neutral using bonds.
-- ITZ