Home > General Topics > Trading > If you hold overnight positions/swing trade, how do you hedge against gaps up/down?

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

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

  2. 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. 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.
  11. Not true.

  12. Well, what happened? Slippage on your stop?
  13. No, i was fortunate in that i had a tight stop and was taken out after the first plane hit. The market, after stopping me out actually went back up a bit and then suddenly smashed down after the 2nd plane hit.

    If i had a larger stop in that particular case, i would have had huge slippage, or may even been locked out when the markets were closed down.
  14. ok, another brilliant reply from you

    that makes about ten where all you post is "not true"

    who are the traders making a living full time that do not need and use margin?
  15. Guys - options are the classic instrument for hedging. However, that does NOT mean they are cheap....you'll have to pay a price for the hedge.

    For instance, Copper has been moving fairly well recently, but margins are about 5500. And you get a margin call if you are down only 7 cents which is only about one-third of the limit move.
    So going into the weekend, if you are long, you'd place a market order for the at-the-money copper PUT contract for the current expiration month. (Use CALLS for short positions in the futures).

    WIth the above hedge, a limit move has little to no impact on your overall position balance.
  16. long dotm puts.
  17. very expensive over the long haul

    for the few times they save your ass, you probably over the course of a year only break even

    that is, you would be better off just taking the hit

    like I said, 50% of the times these gaps go in your favor

    I'm not in love with my positions, I can just close them out and get flat for very little cost, commissions aren't too bad, spread can be a little rough
  18. Have any stats or account statements that prove that statement ?
    dotm puts are cheap, but offer only some protection.
    ATM puts are expensive, but offer full protection.
    Options are flexible in that regard....pick your risk level.
  19. no, only anecdotal

    would be interesting to see the difference between options and just getting flat on the close

    just because you are flat doesn't mean you aren't swinging, you can put it right back on on the open
  20. Not true. :D
  21. Ok, you have a point. I think of margin sort of differently in that I nominally fund my trading.
  22. both tactics are too expensive for me
  23. actually, I employ the most expensive (when it comes to opportunity costs)

    I trade small enough that a gap is just another bump in the road

    I expect them, endure them and half the time enjoy them.
  24. sometimes I think the only difference between trading and investing is margin

    the investor uses his hard earned money

    the trader goes out and borrows to fund his crazy ideas
  25. You're right...that would be quite an analysis. Since Futures Options historic pricing is likely either not available or mucho expensive, doing this with an IB test account would be the way to go.
  26. I don't believe in margin unless you are just starting out and have a four figure account. According to you I am an investor, even more so if I told you I only trade open end equity/bond funds. This year (a typical trading year) I will make about 500-600 trades spread among three accounts. I am almost daily increasing/decreasing/moving to the best relative strength funds etc., but I would hardly categorize my style as that of an investor.
  27. so what is your average annual return?

  28. Unlike when I had a smaller account, average annual return is meaningless to me now. As your account *compounds* over the long haul it obviously takes a smaller and smaller annualized return to generate a large dollar return. One of the perks of getting older and being in the game a long time.
  29. yeah well, we weren't talking about old men getting older, we were talking about young men supporting a wife and children

    My guess is you had a real job, so when it comes to trading for a living you don't really know what you are talking about

    but congratulations for managing the money the company paid you well

  30. Check the archives.
  31. .04 posts per day

    that's hardly beginners level
  32. I know who you are, but you put on more on a whim than I will ever put on even if I can get my brother and mother to go all in on a welll thought out trade.

    Yes, it must be nice to trade on just cash

    but you don't need to rub it in the face of us little traders who still need margin
  33. I am a small time trader. I don't rub anything in the face of little traders. When I use to daytrade stock index futures I always kept my account under $10,000 drawing out the profits on a regular basis to build up my equity and bond fund trading accounts (all cash) All in all, since I turned the corner in my trading back in 85, a mere 3.5% of my total profits came from futures/margin. I just happen to believe margin/leverage is a killer for home-based traders trading their own account. But for a while I had no choice with only a $2300 account in 85. Luckily for me, I traded a then profitable breakout pattern that worked long enough for me to move on beyond futures. Had I failed there, I would be looking at a bleak retirement. I am sorry you disagree but we all have to trade whichever works best for us. Good luck in your trading.
  34. yeah well, when I finally build my account up to $2300 I'm going to rub it in the face of all the little small time margin traders on ET.

    Good luck in my trading? at 40 to one I'm going to need it.

    margin/leverage can be a real killer for a home based trader

    but then again, so can starvation and the guy who comes by once a month and turns off the electricity
  35. My hat's off to you and anyone else completely reliant upon trading profits for making a living.
    All of the character traits needed to make this a success are very rare in any one person.
  36. after I blew up my first account, it took me 9 years working in the real world just to build up a 30k trading account and two years living expenses

    I had three kids and a stay at home wife on my first account, and that lasted 13 years

    then I made the classic mistake of closing out all my winners to fund my one big loser and went completely broke

    second account ended with just an all in lucky trade, and I'm still living off that money, but that's why I won't trade ES anymore.

    third account is a little more reasonable, just a hobby for fun and profit, I don't need it to live on, but that is now exactly what I am doing, but I am very small time, my rent is only $500 a month and kids are all pretty well off on their own, and no wife.

    at $500 a month rent, and living carefully, I really think I could make a living starting with 25k, maybe 50k just to be sure.