Hedging 101 question

Discussion in 'Options' started by bearnbull, Mar 8, 2011.

  1. So I have a couple of Long January Call on XOM that is making money. I would like to hedge it. What is the best way to do it. Do I sell a call same expiration at a higher strike, or a something with an earlier expiration higher strike? On a similar note if the long position has an earlier expiration--say around April or May, what is the best way to hedge it? What if the position was a stock position??

  2. AK100


    Chances are you want to do the impossible, continue to make money if the market moves in your favour but stop losing if price moves against you.

    I'd love to know how to do those trades as well.

    Seriously, a hedge means you take the price of today so if prices move higher/lower you still get today's price. Good if prices move against you, bad if they move with you. But that's hedging.

    Therefore the best and the cheapest hedge is this - sell the position.
  3. MTE


    There is no single best position. Each one has it's pros and cons.

    You can take some money off the table by rolling up the calls to a higher strike.

    You can sell a higher strike call, as you suggested, and this would convert the position into a vertical spread. This reduces risk, but the cost is limited upside.

    You can ratio the number of calls you sell (i.e. if you are long 10 then you can sell only 7 or 8, for example). This reduces the risk, while still allows you keep the unlimited upside with a smaller position.

    You can create a ratio calendar or a diagonal spread...the possibilities are endless. The question is how much are you willing to risk and how much upside you wanna keep.

    If it were a stock position then you could replace it with long calls, for instance.
  4. spindr0


    LOL. I'd buy the first copy of that book! :)
  5. spindr0


    There are many choices and which one is best depends on what your outlook is, your time frame, how much you're willing to risk, etc.

    Good replies from AK100 and MTE. Other possibilities include selling part of the position, buying puts (maybe even delta neutral) and collaring the position if long the stock.

    At a minimum, I'd lock in some gain by taking something off the table (or adding something that reduces cost), trying to get back the initial cost so that worst case scenario is a break even if you really screw up :)
  6. topeak


    hedging...risk management...p/l avg control.
    one super vdo game!!!