Hedging-- what's the most efficient way to do it?

I trade an automated futures system that holds overnight positions about 40% of the time. I'm not too worried about an event triggering an overnight move up (even a bin ladin capture would be good for maybe 2-4%) but I am worried about a 9/11 (or worse) type of terrorist attack triggering a down move of 10-20% overnight. When I'm holding overnight longs I've been buying QQQQ puts about 10-15% out of the money (generally paying $5-$10 per 100 share contract).

I've been thinking about switching to futures options instead (ES seems to be the most liquid and have the smallest spreads) but I wanted to get opinions from others on how you would handle this situation.

SSB

 

Sell OTM QQQQ calls instead of buying puts. You get income.

 

Another hedging tool is the stop losses. By the way how far out are your puts?

 

On QQQQ generally $3 out of the money. Right now they're at 36. The reason I'm not selling options is that I want to limit my risk -- I don't want my hedge to end up losing a lot of money on a bin ladin capture.....

 

I meant what time to expiration do your puts have?

 

A gap down will miss the stops.

 

stops for longs overnight are worthless imo {what are you going to do from 16:15 to 16:30 est ??? if something hits then :eek: } for what you are worried about. you should never rely on a stop to protect you --- you MUST have a hedge to be properly protected at all times for overnight/weekend long positions.

 

Usually a long position will last 3-5 days so I bought Nov 2005 36 puts since I could get them for 5 cents a pop.

I was thinking of potentially putting on a more complex option spread with futures options as a hedge instead but I need to do more research on it (like re-read the Larry McMillan books). The goal would be selling options as well as buying others so the sales would offset some of the purchase price but I'd still be hedged.

Any suggestions?

SSB

 

Put on a collar:
Buy the OTM put and sell OTM call for each put. Your profits will be limited but your futures position will be hedged nonetheless.