Hello, After the recent Globex outage, I've decided to come up with a disaster plan in the event of another outage at Globex, my online broker, or the internet's infrastructure. Say you are long 3 e-mini S&P contracts, with an outstanding stop limit order that is being held on GLOBEX. There's a failure in the chain, so you don't know if the stop has been executed or not. You're not able to access your online broker whatsoever. Luckily, you have a backup accounts at other futures and stock brokers that you can easily reach by telephone, so you can place orders to buy or sell non-GLOBEX traded securities. How would you hedge your open 3 e-mini S&P contract exposure? Here are the two best alternatives I've come up with: A. Buy at the money call and put option on 1 big S&P contract. You'll be perfectly correlated with the e-mini S&P, but you'll have more dollar exposure, since one big contract is still bigger than the 3 e-mini contracts you have open. B. Buy at the money call and put optoins on the QQQs. We can match up the dollar value of the underlying QQQ with the e-mini S&P fairly well. The liquidity and spreads is good. However, the correlation between the QQQ's and the S&P is not perfect. Any suggestions or comments? Thanks. -- ITZ
Look at the Dow mini's over at CBOT. They were up and running during the Globex outage and a lot of folks hedged over there.
You can buy 500 SPY per 1 Emini, or 10 SPY option contracts per mini (since delta=.5)...or any of the things you mentioned above.
Ambush, Thanks for your comments. Yes, the Dow futures trade nicely and would be a good hedge if you know your current open position in the S&P e-minis. However, you might not know exactly what your position may be, because your outstanding stop limit order might have been triggered but you don't have a confirmation of the fill due to the system failure. In this case, how would your hedge your exposure? Thanks. -- ITZ
MYD, Thanks for your comment. I don't believe that options on the SPY are available. It's not available in IB, and I didn't see SPY listed at the CBOE for options. - ITZ
InTheZone, Great point about the SPY options...guess I didn't check if they existed. So the natural substitute would be options on the $SPX. There is plenty of liquidity there. MYD
Yes, $SPX is a viable alternative as well. The only drawback is that the dollar value of the underlying will be larger than that of the 3 e-mini contracts, if I understand the terms of the $SPX options properly. -- ITZ
Maybe I'm missing something here - but how could you ever hedge an exposure that you can not define? You are either long or short or flat. What type of hedge could ever "offset" all of those possible positions?
Good point Quah...I was making the assumption that you could define the exposure...but if the scenario is, you don't know your position, then an effective hedge is impossible as you point out
Something to consider: if you need to hedge due to a well known technical problem - I suspect that the options market makers will gin up the premium to take advantage of your bad fortune. You may be better off hedging with a futures product like the dow futures.