How do I pick the best option (long call) to hedge a short position in case of a sharp rise or tail event? ATM or OTM? One week to expiration or longer? Rules of thumb? Do I need Options Vue or some program like that to show me the various scenarios?
Optimizing option hedges on shorts
- Thread starter Kirribilli
- Start date
There are as many answers as underlying(s).
To clarify things for myself, I would answer:
1) How much of an unexpected pop am I desiring to cover? (What is a "sharp rise or tail event"?)
2) For how long am I looking to cover this risk? (And, How many expirations are available to me {with reasonable trading volumes}?)
3) Am I utilizing the taking of a (top-side) position with any eye towards flexibility? (I.e., buying a 2400 vertical versus buying a 2390 broken-wing, with a long front end, and a short back end)
The biggest things in the option (insurance) trade are distance from market, and distance from expiration. How you decide to work these two can be different for each underlying, each trader, and hell, each day.
To clarify things for myself, I would answer:
1) How much of an unexpected pop am I desiring to cover? (What is a "sharp rise or tail event"?)
2) For how long am I looking to cover this risk? (And, How many expirations are available to me {with reasonable trading volumes}?)
3) Am I utilizing the taking of a (top-side) position with any eye towards flexibility? (I.e., buying a 2400 vertical versus buying a 2390 broken-wing, with a long front end, and a short back end)
The biggest things in the option (insurance) trade are distance from market, and distance from expiration. How you decide to work these two can be different for each underlying, each trader, and hell, each day.
Got ya. Looks as if I need some good software to do this.
Well, to me, that sounds like you want an easy answer -- and I'll forewarn you, there won't be one. *Some* things are easy to rule out, but at each expiry, there will be trades that will do the trick for you, *depending* on how much time you wish to hold the trade. (Thus, which expiry.)
Pretty much any option trading platform has a window through which you can view big portions of the underlying's option chain at once. Eyeballing that will narrow your choices tremendously (to, likely, a given set of strikes and a given window of expirations). No need to find, install, and learn a new piece of software.
FWIW, I use IB's TWS, and scrape data into a .csv read by the open-source OpenOffice Calc spreadsheet. I wish it were live data, but it only takes me 3 minutes between the scrape to print-out in hand. I have posted an example of one particular page that might help -- I'll see if I can find it.
Here it is:
https://www.elitetrader.com/et/thre...ntuitive-thing-you-learned-in-trading.307763/
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