I have an account under management whereas the adviser is trading up to 5 e-mini contracts at a time. Positions are sometimes held over night. I am looking to self hedge this adviser against a downside shock. Is there anyone who has done this in a similar situation? Lets say under the worse of circumstances I am holding 5 e mini long contracts and there is a significant downside shock and no chance for liquidation. What would I have to purchase as far as put option(s) to limit my downside to say 15K total assuming the current price of the S&P at 1450? I am assuming I could just buy one put option on the full size s&p 500 to cover the 5 emini. Any help or guidance would be much appreciated.
Depends on how much of a hedge you want. You have to decide what sort of draw down you're willing to take. Are you going to hold until expiration? Buying 1 full size put vs. your 5 minis will not make you delta neutral unless you go deep ITM and then your spending alot of money for it and you'll need a large rally to make back the cost of the put. If you buy ATM it'll be cheaper but give you less immediate protection. OTMs will are cheaper still but give you wider loss window. Maybe buy 2 or 3 OTMs, if they're cheap enough. At least you get your gammas working for you if it does sell off. Keep in mind that time is working against you. It can be an expensive hedge. One final thought, If you don't trust them to manage risk why are you allowing them to trade your account?
entryprice-(max loss/number of contracts/point value)=strike price of call/put you need to buy. 1450 - ( $15,000/5 contracts/ $50 per point { this equals the number of points away]) = 1390 currently 1390 puts are being offered at .95. .95 x 5 contracts x $50 a point = $237.50+comm equals a total risk of $15237.50 maybe do a 1395put offered at $1.00 that would be 1450-1395 = 55 x $50 x 5 contracts = $13750 + 250 for the puts. so total risk of 14000+commissions Now, why are you working with an adviser that you have concerns of risk? While this idea should help you limit your risk, you may not have enough equity in your account to buy the puts(your margin might be tied up because of the open positions). if your adviser has POA over your account, you may need to do this in a separate account to not affect his performance if he is planning to become a CTA/CPO. If the options expire and you still have the open position you will need to rebuy the options to re-establish the hedge. you can get option quotes from CME, bottom left side of their front page has the link. Sorry if i lose you with the math, i tend to get kinda geeky. Feel free to call me for more info
??....................Using the big contract, consider putting on some type of put-backspread position initiated at near break-even with 2 extra long-puts, ( i.e. a 1 by 3, 2 by 4, 3 by 5 et al), as a form of "free insurance". The 2 extra long puts should provide some cushion.
"free insurance" ? I agree that a put backspread can be a good option here but you're not going to put on a 5 point 1 by 2 for a 5 point credit and if you buy more wings you'll pay for the whole thing. You can still lose money on the backspread if it doesn't move. But, I think Nazzdack is right, if you can put on a 1 by 3 or 3 by 5 for even you limit your risk to only a sideways market. I still think the main point here is, if you trust your advisor to trade you account then let him trade it, don't undermine his strategy, if you don't trust him, don't let him trade or limit his ability.
IM Optioncoach. The gentleman has a rather long thread on S&P options. He prob could answer your question.
... another option to consider would be to setup an intra-day trading system, (if you trade during the day) which only takes the opposite position of the one that you advisor is taking. JJ
... but what i really think is the best advice of all? scale down your size until you can sleep tight without a care in the world, and start scaling backup accordingly when your account has earned the equity. JJ