My long position on the December 05 Yen has dropped about 2% since I opened it more than a week ago. If it doesn't come back up in August, what can I do to limit loss besides closing it right away? Can I do it an inter-month spread, say short either the September 05 or the March 06 contracts, limit my loss to the difference between the "initial spread" and the "final spread"? What would be the risk of doing that? The "final spread" becoming too big? Or execution risk where I will have trouble closing one of the positions? I'm new to this so any help will be greatly appreciated. Thanks!
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limiting loss on a losing futures position with inter-month spread
- Thread starter mgzheng
- Start date
Yes, to open a spread position in a further out month you will limit your loss to the difference in the spread. Of course the difference will fluctuate very slightly as one contract is likely more liquid that the other. But you will still be stuck with the loss, as one contract will gain, the other will loose. There are more commissions as well.
If it was me I would look into buying in or near the money puts or calls (depending on your position), but you will be out the premium of the options and in order to recoop the premium the futures will have to move substantially in your favor. But that is what I would do, I think that would be a better choice than an inter-month spread.
BTW If you remember me, I talked to you a month ago about some historical grain data. If you still have it, please get in touch with me.
If it was me I would look into buying in or near the money puts or calls (depending on your position), but you will be out the premium of the options and in order to recoop the premium the futures will have to move substantially in your favor. But that is what I would do, I think that would be a better choice than an inter-month spread.
BTW If you remember me, I talked to you a month ago about some historical grain data. If you still have it, please get in touch with me.
The more I think about it I'd definately buy either an in the money or near the money put. At least with this you will have a chance or recooping your loss if the market moves up.
Hey Nick Jr, I remember you. First of all, I sent the price zip files to your excite.com email and it bounced back. What is your current email?
I looked into put options as the first thing. When I looked a week ago, cost of put options wasn't too far away from just taking the lost. That's why I am trying to find out if there are other ways to hedge when trading commodities. But I looked today, cost of put options are totally different. Guess have to check options prices every day.
Well, here is another question then: for pretty far out contracts like Dec05, what's more popular? stops or put options? And why? Thanks again!
I looked into put options as the first thing. When I looked a week ago, cost of put options wasn't too far away from just taking the lost. That's why I am trying to find out if there are other ways to hedge when trading commodities. But I looked today, cost of put options are totally different. Guess have to check options prices every day.
Well, here is another question then: for pretty far out contracts like Dec05, what's more popular? stops or put options? And why? Thanks again!
Seasonal repatriation? Can you explain please? I am going to check the October price patterns for the past couple of years. I might still want to close it out for now (prices came back up yesterday after US trade figures came out). If it happens in October, then I'm not going to tight up that money right now. Going to put it in something else that usually moves in August.
Quote from mgzheng:
My long position on the December 05 Yen has dropped about 2% since I opened it more than a week ago. If it doesn't come back up in August, what can I do to limit loss besides closing it right away? Can I do it an inter-month spread, say short either the September 05 or the March 06 contracts, limit my loss to the difference between the "initial spread" and the "final spread"? What would be the risk of doing that? The "final spread" becoming too big? Or execution risk where I will have trouble closing one of the positions? I'm new to this so any help will be greatly appreciated. Thanks!
If you spread to limit your loss you will also limit your gain, if the trade has reached a point where you can't or don't want to lose{/u] any more you just need to close your position. Also the further the contract is out the more volatile, so by shorting the Mar06 you are likely to lose more in it than you would gain from your original position if the market went up. Spreading off to Sep 05 only hedges you for about 3 weeks. You could roll your dec05 to mar06 and short the dec05 but I think you should just get out of the trade.