If you hold overnight positions/swing trade, how do you hedge against gaps up/down?

Discussion in 'Trading' started by Nutinsider, Oct 20, 2012.

  1. The title is pretty self-explanatory, however I'm sorta curious how some of you manage this potential issue with gaps?

  2. Daring


    Skip earnings and diversify capital into different plays.
  3. this is an issue that is very overlooked yet could by itself blow you up if not prevented. if you're using leverage of any kind - futures/options/cfd/whatever - and there's another 9/11/flash crash/black swan then you're done if you haven't hedged.

    for example, what if you're long futures and the ES goes locked limit down? what if you're long call options and the same thing happens? instant wallpaper.

    the best way to prevent this is to always have a hedge on in the form of OTM options. this will mostly be puts but it could be calls for example if you're short CL futures what happens if Israel bombs iran and crude doubles overnight? you'd OWE the clearing firm money you'd be so underwater.

    another way is to hold cash but i've found you'd have to hold so much of it as a % of your port that it's more efficient to hedge w/ otm options.

    if anyone has any other ideas pls share
  4. I trade forex, which except for 15 minutes every day is 24/7.

    But the weekend gap can be quite substanitial

    The way I handle it is to get evened up on Friday if I am concerned

    or like I say

    99% of what I do is trading

    1% is gambling

    the weekend gap can be a benign form of gambling

    50% of the time you win

    50% you lose

    I don't like getting flat on Friday because it can be hard to get back in

    So I just enjoy (or endure) the weekend gap
  5. 1. do not use margin in overnight position. everything will be great. avoid futures, leveraged stock buying, short sales.

    2. buy options just OTM. do not buy deep in the money options. also avoid stocks above 10 bucks and each position just represents a single digit percent of your total account value. most people thinks why not buy expensive stocks. becuase streets suggest it. do not do it. when you buy expensive ones, you will not feel the danger or trap quickly, you will easily be trapped to buy down, you are thinking you are buying a pullback. another reason is when you bought expensive stuff, you put higher stake on it, so you will be emotionally attached to your trade. third reason is expensive ones often have black swan event. but for a penny stock, if you bought 100shares or even thousand shares, if belly up, no big deal. if you bought a 50bucks stocks, suddenly it announced it can not pay its bill, even 100shares, you lost big. for an 600 stocks, 100shares, if bad earning and fundemental trending down, over a night cut half thing happens pretty commn, do not put yourself into this situation.

    never put too much on the risk per each trade, I think 2%~10% is good.

    3. do good research,dig. but as we traders know, lots of things can be not predicted. who can predict 911 in 2011? no one, only those plotters. research can not gurantee analysis conclusion. that is why never risk 2%~10%per trade is hard rule. never suppose the thing you do not expect will never happen.

    if your account is cash. buy stocks based on their business promise, earning trend,bright future whether expensive or cheap. do good research, dig. do not buy penny stocks. buy those whose business are in the strong surge trend. ignore overnight gap down/up. plan to hold, choose to be patient. do not diversify, focus on the biggest winner
  6. yeah whatever, you aint gonna make any money without margin

    they give you two choices

    1 is to get a job

    2 is to use margin
  7. There are OTC products for hedging gap risk, but i assume not very accessible for retail. Google for gap notes, daily cliquets, gap risk swap.
  8. i agree this is a good option but the cynical part in me doesn't trust anything that's not exchange traded and cleared. what happens if your counterparty to the note/swap goes bust like BSC or LEH? or what happens if they refuse to pay you like GS did w/ michael burry w/ his housing CDS?
  9. good responses. learned a lot. thanks
  10. Visaria


    Use no leverage on overnight positions. I don't. Btw, that's still no guarantee than you will not be blown out (eg short some stock which then more than doubles overnight because of a takeover).

    I note that you are asking about overnight gaps. What about during the day? I had LONG positions in ES when 9/11 happened, about 2pm London time, day time for me.
    #10     Oct 22, 2012