Best Liquidity For S&P 1:1 Hedge

Discussion in 'Options' started by hedgemoney, May 2, 2009.

  1. I'm looking to hedge a S&P portfolio with index options that have the best liquidity, tight B/A spread and track close to 1:1 with the index. For what I found so far it looks like the SPX options have the best of both. I would like to trade the ES options for round the clock trading but they look thinly traded and hard to trade out of during extremes.

    Is this correct ? Are there are any others I've missed ?
  2. Suppose I have a $40,000.00 portfolio of stocks whose beta is about the same as the S&P 500 (beta of 1). Suppose the ES (s&p emini futures are trading at 800 and you expect the amrket to continue downward. In my experience, the best way to hedge this is using the s&p e-mini futures. this basically gives you a 1:1 ratio. You would sell 1 ES to hedge your $40K portfolio. Each ES future at 800 has a notional value of $40,000.00 (50 times the current value of the ES futures). So, in this case, you have a 1:1 ratio. I do not recommend overhedging. If your portfolio is worth $60,000.00, I would still only hedge using one ES future.

    The other option is to buy OTM puts (3-5% OTM, IMO). This requires more work. You must know the delta of the options at all times so that you can keep the correct number of puts in play. You will be constantly adding and subtracting the number of contracts as delta changes. I am blanking out--perhaps someone can calculate the number of puts needed to hedge the $40K portfolio--given a delta of .20 (20) for the puts. thanks.