How can I use futures to hedge against selling vertical call spreads?

Discussion in 'Index Futures' started by frank99, Aug 30, 2006.

  1. frank99


    I was wondering if someone could give me a specific example of how to use futures to hedge against selling veritcal calls. For example, let's say I sell:

    10 SPY Sept 132/134 Calls

    How can I use futures to hedge against them. Let's say I'm afraid that the strike price of SPY will go above 132.

    Yes, I have done research, and yes, I even bought and read a book that covers how to do this. After reading the book, it was so generic, I still don't know how to do it exactly.

    Thanks for any help in advance.

  2. tplast


    You need to figure out what your deltas are going to be at 132. They change with the passage of time and movement of the underlying, but you know that they’ll be –1000 at expiration because you are going to be losing $1000 each point until you hit your max risk of $2000 (134-132)*100*10 (not counting the credit received).

    So, you need to make $1000 for every SPY point. A one point move (i.e. from 132 to 133) on SPY is the same as a 10 points move on the ES (1320 to 1330). You need to do $1000 for each 10 ES points and you know that each ES point is $50, so you go long 2 contracts ($1000/10/$50) when SPY hits 132.
  3. MTE


    If you want to hedge now then 2 ES is way too much. At the moment, your delta is about -244, so that's about -24 in ES terms, so you need half a contract right now. Assuming SPY hits 132 today, then you'd be about -326 deltas or -32.6 in ES. So, again you need less than 1 contract to get yourself to delta neutral. If you wanna be hedged at expiry then just get out of the spread now and save yourself commissions and headache with ES.

    Besides, if your analysis turns out to be wrong then your short vertical will never be able to offset the loss on ES. Never hedge a limited risk problem with an unlimited risk instrument!
  4. cvds16


    Said in another way: if your hedging you're basically starting to trade volatility. I don't think that's what you did it for.
  5. Quin


    If I open a position with a sprd, I don't want to turn this into a Rembrandt by hedging a hedge.

    Your exit strategy should be simple, either bring in some of your Shorts or close the Sprd at a critical upside point.
  6. frank99


    Thanks for the replies. This is exactly what I was looking for.