Hedging futures with options

Discussion in 'Options' started by Aitch Eff Tee, Nov 26, 2009.

  1. Aitch Eff Tee

    Aitch Eff Tee Guest

    Hi everyone,

    I am a novice Globex futures trader (risk adverse in nature) and am looking to fully hedge my futures positions using options.

    I just want to check with those of you here more familar with options than me if the following example scenario is accurate.

    I decide to go long in a futures instrument and buy 5 contracts at a price of 1000.

    I want to limit my risk to 50 points so I simultaneously buy 5 puts with a strike of 950.

    Am I correct in thinking that my downside is absolutely limited in any market meltdown scenario (barring the collapse of my clearing firm etc) to 50 points because I can exercise my options (the options on Globex are American options I believe) at any time to close out my futures position.

    I understand that what I am proposing here is actually a synthetic call and the example I have given is actually a gross simplification of the way I intend to use the hedge, but I just want to make sure that conceptually I have got things straight. If I purchase an equal amount of calls/puts to offset my futures position then they will provide absolute cover.

    Thanks in advance