hedge with futures for stocks

Discussion in 'Strategy Development' started by coolweb, Jun 5, 2007.

  1. Lets say you think the stock ABC is going up 5% if market stays put, but you are confused cause its the summer markets at the market direction

    but you are sure the stock will go up.

    You buy $50,000 worth of ABC with a stop
    You short 1 contract worth of YM futures.

    YM futures will be closed once ABC is sold
    if ABC is stopped out, YM position will be closed.


    What kind of problem can exist in this type of trading?

    Whats your thoughts on this.
    I know this is a simple hedge, just seeing if anybody else uses method to trade with relatively lower risk.
     
  2. dealer

    dealer

    A number of issues, a couple being:

    - basis of YM vs stock in question
    - daily margining of YM position
     
  3. tested this out today
    worked beautifully
    not only did I sit on my shorts for the whole day, my stock longs made money or just sat there.

    I would have never sat on my shorts for that long, if I wasn't hedged..

    hedged sort of gave me a smokey high feeling :> like everything was ok....

    even when the market rallied on my YM shorts I had no fear, I was seeing butterflies.. ooohhh look at the butterflies....

    -----
    I'm seriously wondering if this is how instutions trade..... Since they can't sell their stock during a market drawdown with liquidity issues.



    Will research this more
     
  4. ess1096

    ess1096

    Why not Buy your $50,000 worth of stock ABC and an equivelent position of ABC Puts? A synthetic call.
     
  5. because sometimes when dow gaps up 0.3%
    the stock gaps up 2-3%

    therefore I make money through the pressurized buying

    if I bough some options, I'd lose the same amount of money, I want to let my winners fly up instead of restricting.