Hedging longs against catastrophes

Discussion in 'Automated Trading' started by dwrowley, Jun 12, 2010.

  1. dwrowley


    Hi all - I have an automated system that trades long/short, and usually stays in the market overnight and over weekends.

    Does anyone have any good mechanisms to hedge long positions held outside of market hours to protect against catastrophic drops in the market upon open? (terrorist activities, 9/11, etc.)

    I don't worry about 5% drops or so, just would like to protect against 10%+ drops (waking up and seeing the futures down 1000 points, etc.)

    Ideally, I'd like the hedge to be fairly easy to maintain (perhaps out of the money put spreads on SPY?), capital efficient and commission efficient.

    Does anyone hedge their overnight long positions? (I don't worry about my short positions held overnight as it is far less likely that the market will gap UP 1000 points :)

    Thanks for any pointers,
  2. look into allocating to a long volatility fund or create one yourself. You may need to be long volatility in several asset classes to adequately hedge - use equity, bond, and FX overlays.

    equity - OTM puts on stocks/indices
    bonds - OTM calls on treasuries/gov bonds. Also look into Ted Spread trades
    FX - long risk averse currencies - JPY, USD, etc.

    Might consider overlaying a call selling strategy with your long short strategy, using it to finance the purpose of OTM puts to be more risk averse (especially in this environment)
  3. gkishot


    There is no foolproof protection against complete wealth destruction.
  4. Yes, just work out your long market exposure then short an equivalent amount of S&P futures overnight.