Using Options to Hedge an Outright Futures trade against ......

M

md2324

a Limit Up/Down possibility . My question is Regarding using Options for Hedging , an Example of this would be .... Say we are Long the ES , so we would look to buy an outright ATM Put on the SPY or SPX ? And can you please explain a bot more about " Emergency Stops " ? I have read that if you are say Long Cotton , and Breaking news comes out with negative news of a drought or boll weevils end up destroying a large crop of Cotton, then a Limit ( Down in this instance ? ) could occur, and you as a trader in a Position when this Breaking News hit the wire, will have no way to get out of your trade. You are basically " Locked " into that trade , until Either 1. The market stops crashing OR that Market hits its MAX Limit Down Price Point. And a Futures Limit Up/Down price points can be Big , in terms of $ amounts. ANd I have also heard that Any Stop you have placed , at the time of a Limit up/down move, tends to get blown right through, and you can easily suffer substantially more than you had intended to, since the Market blows right through stops in these instances. And Lastly please..... How would you Hedge an outright Futures trade on markets such as Cotton, Wheat, Soybean Meal, Copper, Feeder Cattle , as these Markets ( and others ) do not Have any equivalent ETFs that are Optionable .... Take BAL as an ETF for Cotton as an examle. And even if Markets like these do have ETFs ..... usually these Options Have Wide spreads between the BidxAsk, And little to no Volume or Open Interest on the Options. Thanks again for the insight and help, Really appreciate it
 
md2324 said:
a Limit Up/Down possibility . My question is Regarding using Options for Hedging , an Example of this would be .... Say we are Long the ES , so we would look to buy an outright ATM Put on the SPY or SPX ? And can you please explain a bot more about " Emergency Stops " ? I have read that if you are say Long Cotton , and Breaking news comes out with negative news of a drought or boll weevils end up destroying a large crop of Cotton, then a Limit ( Down in this instance ? ) could occur, and you as a trader in a Position when this Breaking News hit the wire, will have no way to get out of your trade. You are basically " Locked " into that trade , until Either 1. The market stops crashing OR that Market hits its MAX Limit Down Price Point. And a Futures Limit Up/Down price points can be Big , in terms of $ amounts. ANd I have also heard that Any Stop you have placed , at the time of a Limit up/down move, tends to get blown right through, and you can easily suffer substantially more than you had intended to, since the Market blows right through stops in these instances. And Lastly please..... How would you Hedge an outright Futures trade on markets such as Cotton, Wheat, Soybean Meal, Copper, Feeder Cattle , as these Markets ( and others ) do not Have any equivalent ETFs that are Optionable .... Take BAL as an ETF for Cotton as an examle. And even if Markets like these do have ETFs ..... usually these Options Have Wide spreads between the BidxAsk, And little to no Volume or Open Interest on the Options. Thanks again for the insight and help, Really appreciate it
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yep that's about right, except drought and boll weevils should make cotton go up.

otherwise, there is no sense in hedging a futures position. Futures are the hedge. If you try to hedge futures you are just trying to hedge the hedge of the hedge. For a small retail trader hedging only makes sense if you are trying to stretch a short term gain into a long term gain for tax purposes.

the best hedge for a futures trader is cash

figure out if you were long and bought a put what your max loss would be, and then just put on a position that if your worse fears come to pass your loss would be the same.
 
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Rather than looking for ETF options on the commodity you could trade the futures option contract... Just make sure you get the beta and position sizing right so your loss on the underlying is compensated for in the option. You will still have a spread zone where you incurr a loss if the underlying resides in as the option expires. So it really depends on the market you are trading. Regardless of strategy involved, I believe an a futures options contract is what you are looking for.
 
Beta?

Typically, you're trading a synthetic call or put if buying an OTM option against the futures. You could start by simply buying the deep ITM option, in lieu of trading the synthetic later.

Long futures at 1000 -> Hedge in buying the 900P at 3.00 = long synthetic 900C at 103.00 equivalent.

Or just buy the 900C at 103.00 If you want to define the risk and don't have a pre-existing futures position.
 
Thank you both for your replies

brucelevy ,
Can you please post a Link or give the Symbols for a variety of the ( Futures Options Contracts ) ?

Do you basically mean..... for the ES you can trade the SPY , for the NQ you can trade the QQQ, for Cotton you can trade BAL , for Gold you can trade GDX , for Crude Oil you can trade USO, etc. ??

Thank you
 
md2324 said:
Do you basically mean..... for the ES you can trade the SPY , for the NQ you can trade the QQQ, for Cotton you can trade BAL , for Gold you can trade GDX , for Crude Oil you can trade USO, etc. ??

Thank you
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Well you'd have to look at how the ETF gets its exposure to the future you are trading. I know for ES you can hedge directly with SPY. The relationship is 1 ES = 500 SPY.

So for example if you buy 1 ES, 10 50 delta Puts on SPY will put you flat.
 
I haven't looked into it however do the ES/SPY/SPX directly follow each other tho? I know they follow the S&P 500 however sometimes the futures contract gets outta whack.
 
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