Overnight Market Protection

[EliteThink]

Quote from slapshot:




Isn't this a market neutral position?

Would not the value of put and call change in tandem somewhat? One would go in the money more and one would be less valuable, correct? Kind of a wash?

If so, how does that hedge whatever you are holding overnight?

Sorry for newbie options questions.

Thanks,

Paul

Good questions. Short a call and long a put is the same as being short a future. It is also known as a synthetic future. If you are long a future and you short a synthetic future there is no risk but there is also no reward. Meteoxx has fine tuned this to make it profitable and does well

Buying puts for protection alone will lose over time.

 

[patefern]

Quote from slapshot:




I think the first step in designing a hedge would be to define what commodity/intrument/equity you would own already that you need to protect.

Wait, first you said you want to protect, now you are saying take-advantage - which is it? Two different strategy altogether usually.

The reason I'm posting is to learn along with you -

OK Options guys/gals, lets say a person is holding 4 ES E-Mini overnight and wants to protect against anything more than a 10 point move against the position - what would you use as a hedge?

calls, puts, in the money, at, out of, buy 'em or sell'em?

Cmon, help out some rookies.

Thanks,

Paul

Stock777 has the answer, go home flat rather than a 100% hedge. If you want some protection and smaller cost than being 100% hedged you would buy the out of the money put/call for your long/short position.

If you are long the 4 mini's, you could buy the at the money put and sell the out of the money to reduce your cost, reverse for short position, however we are talking about overnight protection and trades that last a day or two, just get flat.