basic setup: At some point in time during market hours, I would like to hedge my nasdaq portfolio against further declines. I've never traded options, read through some CBOE edu sites, still need help to start. I learned that I should by a PUT option NDX. Questions regarding further parameters of the options I should take: - which strike price? assuming nasdaq-100 index is at 2000, when I buy the hedging put option - which expiration date? I would like to hedge for 2 days at longest - what premium quote, how many options (quantity)? I experienced that I can fully hedge my portfolio approximately with 3 NQ emini futures contracts. I'm with IB. Are there anything else to consider? any help greatly appreciated! torel

There is a lot to consider, but as you have experienced that selling 3 futures hedges your portfolio, why hedge with instruments that have a greater number of variables to consider? Pure to hedge the delta risk the futures are very effective, and it;s a cheap and easy solution. If you have no experience trading options I would start by reading Natenberg, until then just hedge with futures.

3 NQ emini futures are 60 deltas. NDX Aug 2000 put has a delta of 0.52, so one contract has a delta of 52 and would slightly underhedge the portfolio. NDX Aug 2025 put has a delta of 0.63, so one contract has a delta of 63 and would be equivalent to 3 NQ's. However, I agree with the OP, if all you want is a 2-day delta hedge then just stick with futures, the slippage is lower and there are less complicating factors, namely no gamma, vega or theta.

thanx for your reply. The biggest advantage of options over futures in this case is that options have an asymmetric gain function, so it makes possible to avoid losses and allow gains at the same time (theoretically). I now tried out at IB to select an option for my needs. Fortunately, in case of NDX there are no further parameters to choose from (there is only routing exchange, strike price, put or call, expire date). MTE, thanx for the basic calculation. Why does this assumption about asymmetric hedging not hold?

When you hedge with futures you give up not only all of your losses, but also your gains. Delta hedging with options is the same principle. However, while futures' delta is constant, option's delta changes as the underlying moves, so as the option moves further OTM (in case of a put the index moving up) the option's delta decreases so your overall position (portfolio plus put) is starting to get long deltas, thus the gains on the portfolio are not fully offset by losses on the put option. That's why delta-hedging with options is a dynamic process requiring constant re-hedging. The speed with which delta changes is measured by gamma. So if an option contract has a delta of 60 and gamma of 3 then if NDX moves up 1 point then the put's delta will decrease to 57. So to sum up, the payoff is assymetric, but you need a big move to profit. If you want to create a long call payoff (i.e. unlimited upside, limited risk) then you need to hedge 1 for 1 and not delta hedge. That is, buying a NDX 2000 put to protect the portfolio is like buying a NDX 2000 call.

MTE, thanks a lot, but I don't really get your last sentence. Are you saying that underlying+put option = call option? How can I find one with a big gamma? (As I understood gamma is the measure of "asymmetricity")

Yes, it is the basic synthetic relationship. 1 NDX 2000 put and a 200K portfolio is equal to 1 NDX 2000 call. Front month ATM options have the highest gamma, but also the highest theta (time decay).