Using Straddle/Strangle for Active Trading Hedge

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GreatRedOne

Hi, has anyone ever used a straddle and or strangle as an hedge while trading equities or futures?

Example, setting up a straddle and or strangle to act as a "safety net" while intraday trading. Standard stops can be blown through in chaotic situations. My concern is, if you're long/short some stock or ETF and something goes very wrong: power failure, terrorist attack, flash crash or a freakin' asteroid!, that you have protection in place against an open position. The math works pretty well, paying the "insurance premium". By having the long the option position yields a bit of peace of mind.

Any ideas on active hedging?

Thanks in Advance
 
Each day you will have to calc you loss to theta and vega. You may win on vega, but if you're trading the strangle as terminal distribution, the gain won't matter. Just factor the premium into your delta1 edge.

I carry overnight so I am always buying DOTM puts in single-name and typically with 2-3 month durations. I buy stuff from 0.30 to 1.00 in prem. It makes no sense to buy upside calls.
 
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For example, the Nov70P in WMT is 0.20. You're up $5K for the week? Buy a 25-lot of the Nov. Or buy the 70/75 put spread 8x. Generally, these are throw-away, so you want to be as cheaply as possible. I don't like to limit my outlier hedges, so I prefer to be in singles / verts.
 
convexx said:
It makes no sense to buy upside calls.
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You ever worry about things like takeover risk or are the single names you're trading large-caps where that's not a concern? What happened with that Puma biotech earlier in the year is the stuff that keeps me up at night (i.e. >100% moves). Granted that's biotech, but I'm sure there's some smaller tech firms out there where something similar could happen. I'm always torn between the "easier" opportunities in small/mid-caps (especially on the short side) versus the remote risk of getting blown out on the upside even with a small position. Obviously playing these with options would be ideal but the bid/ask spreads make it impossible.
 
jtrader33 said:
You ever worry about things like takeover risk or are the single names you're trading large-caps where that's not a concern? What happened with that Puma biotech earlier in the year is the stuff that keeps me up at night (i.e. >100% moves). Granted that's biotech, but I'm sure there's some smaller tech firms out there where something similar could happen. I'm always torn between the "easier" opportunities in small/mid-caps (especially on the short side) versus the remote risk of getting blown out on the upside even with a small position. Obviously playing these with options would be ideal but the bid/ask spreads make it impossible.
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No, this is purely an macro-event hedge. I am solely in FX and index exotics now, but the PNL convexity is much better in index than single-name when discussing listed vanilla options. So, I prefer index, but only trade large cap tech when trading single-name primary positions.
 
convexx said:
No, this is purely an macro-event hedge. I am solely in FX and index exotics now, but the PNL convexity is much better in index than single-name when discussing listed vanilla options. So, I prefer index, but only trade large cap tech when trading single-name primary positions.
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Gotcha, makes sense.
 
Thanks. I figured the hedge was a total loss, like a hurdle rate to overcome for the life of the hedge. Namely, establish a 2 standard deviation straddle with the peace of mind, no matter what happens your loss, whether long or short is limited by the strikes and what you paid for the hedge. Buy the insurance and trade, to pay for it. LOL

Thanks for the info!
 
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