Using options as a hedge for futures trading

C

chaswood

I am rather new to futures trading, but have had some encouraging results so far trading the e-mini.

The thing that scares me the most is a world shaking event that halts trading and moves the market 20-30 handles or more (like 9/11). Is this a valid concern? I know that the markets were protected some after 9/11, but a lot of money could potentially be lost.

I've been thinking about establishing a strangle position with QQQ leap options.

Does anyone have experience with this that could make some recommendations?

Since 1 e-mini contract is worth about $50k and one QQQ options contract controls 100 shares worth about $3k, does it make sense to use about 16 pairs of option contracts for each e-mini contract you trade?

Is there a better optionable S&P proxy than the QQQ to use?

What kind of put/call spread do you use for the strangle? The wider the spread, the cheaper the contract cost, but the greater your potential loss.

It also seems that the strangle itself could be profitable over a period of time even if the market doesn't jump on one event. Even though that is not my primary goal, I never turn down a profit.

I greatly appreciate any advice from more knowledgeable traders!
 
Quote from chaswood:

I am rather new to futures trading, but have had some encouraging results so far trading the e-mini.

The thing that scares me the most is a world shaking event that halts trading and moves the market 20-30 handles or more (like 9/11). Is this a valid concern? I know that the markets were protected some after 9/11, but a lot of money could potentially be lost.

I've been thinking about establishing a strangle position with QQQ leap options.

Does anyone have experience with this that could make some recommendations?

Since 1 e-mini contract is worth about $50k and one QQQ options contract controls 100 shares worth about $3k, does it make sense to use about 16 pairs of option contracts for each e-mini contract you trade?

Is there a better optionable S&P proxy than the QQQ to use?

What kind of put/call spread do you use for the strangle? The wider the spread, the cheaper the contract cost, but the greater your potential loss.

It also seems that the strangle itself could be profitable over a period of time even if the market doesn't jump on one event. Even though that is not my primary goal, I never turn down a profit.

I greatly appreciate any advice from more knowledgeable traders!
More...

Have you looked OEX options? S&P100 has a much higher correlation with S&P 500 than NASDQ 100 has. OEX index is round 500 and one contract ($50k) is about the size of an e-mini S&P. Plus, OEX option's (bid - ask)/vega ratio is much less than QQQ option's ratio, lower your spread transaction cost. I never traded them together. Just something you may want to take a look. Good luck!
 
If you're looking to hedge an S&P e-mini, you have several different choices. But first things first, using the QQQ to hedge an S&P position is NOT your best course of action(lots of people have blown out trying to cross-hedge these products or QQQ and DOW--example of possible situation would be AMAT warns of lower earnings sending QQQ lower, while HD says sales are off the chart, helping the DOW rally sending the two markets in opposite directions). You should be looking at the SPX (S&P 500 options) at the CBOE if you want to hedge with options, or the S&P 500 options that trade at the CME--by the way the CME contracts are for one big future, not 1 e-mini, and although I believe they have e-mini options they are very illiquid. Another option that you have is to look at the OEX (S&P 100) also traded at the CBOE which will have a high correlation to the S&P. One last thing you can do, although it can also be capitally intensive is to consider hedging with the SPY which is the ETF (exchange traded fund) based on the S&P 500, which will have almost a 100% correlation with the S&P. Hope this helps, and good luck.

Vega
 
The CME SPX option takes about 10-11K margin per contract. The futures option is illiquid, but takes far less margin to put on, about $4400 for an equivalent position during non-market hours.
 
Thank you all for your advice. I think you've pointed me in the right direction.

I looked at the Dec 05 SPX 975 puts and calls at about $90 each vs. the Jun 04 at about $72 each. For a hedge insurance policy, this seems like a reasonably low Theta.

The liquidity does not seem great, but since I am buying American style puts and callc, I can always exercise them if needed.

Amd because the chances are fairly good that the SPX will move more than 100 points (handles) between now and Dec 05, it could be an okay investment by itself (though that is not my primary objective).
 
Quote from chaswood:

....but since I am buying American style puts and callc, I can always exercise them if needed.....
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They are European exercise.
 
Chas - just because the options are sold on an American exchange, doesn't mean they're American-style options. Check the option contract specifications before you trade any options.
 
Quote from chaswood:


The liquidity does not seem great, but since I am buying American style puts and callc, I can always exercise them if needed.
More...

OEX is American style, and has more liquidity than SPX.
 
Quote from theTaoTrader:



OEX is American style, and has more liquidity than SPX.
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The OEX used to be a great contract, but it has fallen on hard times. For a very long duration hedging situation its probably alright, especially if you are going to use scales and hedge going out a number of months. But short term, the liquidity has been junk for quite awhile. Spreads are almost always 50 cents, even on the far OTM strikes, which should narrow accordingly.
 
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