Using options for hedging

gkishot · Nov 21, 2012

Quote from Stoopidly:

Thank you all for your replies.

To answer some of the questions here. In my current strategy I only trade stocks with a 2:1 leverage, and don't have any intentions of increasing leverage until my strategy is proven profitable. I don't really look at leverage as an advantage, or disadvantage for that matter, it just doesn't fit into my strategy yet.

To be honest with you all, I don't plan on getting too deeply into the different strategies of options trading anytime soon, as I don't know nearly enough on it yet.

If dividends play a role in the pricing of calls I can see why it "looks" cheaper than it really is. That explains some of the questions I had.

I could add that my strategy hold stocks on average about 5-6 days. This is mostly data from backtests, with a couple of months paper and real trading. As of now it seems to be pretty accurate. My idea was that if I find out the average loss per trade, on a high confidence level, I could hedge those trades with a protective option (when that is cheaper). That way I'd improve my profit/loss ratio. Even better, since I already have accounted for maximum loss on that option, I could exit my stocks as usual and just hold the option and see if I can make some of the losses back, a win-win situation.

Hope I answered the questions that were directed at me.
Thanks again for all your replies, its been very helpful!

If you are 2:1 leveraged on stock than it's cheaper for you simply to buy a call than the stock itself and protective put. At least you don't have to pay margin interest.

Stoopidly · Nov 21, 2012

Quote from gkishot:

If you are 2:1 leveraged on stock than it's cheaper for you simply to buy a call than the stock itself and protective put. At least you don't have to pay margin interest.

Margin interest is something I didn't even think about. I will consider just keeping it simple and going long call then. Thank you.

cdcaveman · Nov 21, 2012

Quote from Stoopidly:

Margin interest is something I didn't even think about. I will consider just keeping it simple and going long call then. Thank you.

One of the things i did.. when starting this endevor into understanding options.. (not long ago) i went to this site.. everything is free... you can take classes, or just read as you need.. it really helped me alot..

So being that a call is derived from the underlying.. there is a cost of carry associated with selling you a call option.. because pricing of a call option includes the interest of carrying the stock .. a quote from the page i listed below.. no kidding you can call the 800 number for free and ask whatever questions you want.. i have done it several times..

"For a professional trader looking to remain Ã¢â¬Ådelta neutralÃ¢â¬Â and not be impacted by market movements the offset to a short call is long stock. Long stock requires capital. The cost of these funds suggests the call seller must ask for higher premiums when selling calls to offset the cost of interest on money borrowed to purchase the stock. Conversely, the offset to a short put is short stock. As a short stock position earns interest (for some large investors at least), the put seller can ask for a lower premium as the interest earned decreases the cost of funds."

http://www.optionseducation.org/strategies_advanced_concepts/advanced_concepts/put_call_parity.html

Stoopidly · Nov 21, 2012

Quote from cdcaveman:

One of the things i did.. when starting this endevor into understanding options.. (not long ago) i went to this site.. everything is free... you can take classes, or just read as you need.. it really helped me alot..

So being that a call is derived from the underlying.. there is a cost of carry associated with selling you a call option.. because pricing of a call option includes the interest of carrying the stock .. a quote from the page i listed below.. no kidding you can call the 800 number for free and ask whatever questions you want.. i have done it several times..

"For a professional trader looking to remain Ã¢â¬Ådelta neutralÃ¢â¬Â and not be impacted by market movements the offset to a short call is long stock. Long stock requires capital. The cost of these funds suggests the call seller must ask for higher premiums when selling calls to offset the cost of interest on money borrowed to purchase the stock. Conversely, the offset to a short put is short stock. As a short stock position earns interest (for some large investors at least), the put seller can ask for a lower premium as the interest earned decreases the cost of funds."

http://www.optionseducation.org/strategies_advanced_concepts/advanced_concepts/put_call_parity.html

Oh wow, that's a nice webpage, will definitely be reading more on that. Thanks a lot