I am brainstorming ideas on limiting position risk in index futures w/o using stops. Why w/o stops? During dramatic event stops may not always work. I would like to limit positions risk to 10%. Here is what I have come up with so far: 1) trade short only, due to directional bias in stock market 2) offset long positions with options (strike ~ -10%?)... this will carry high transaction cost (I trade once a day on average)... also, option position will probably not offset the loss completely... 3)? Any thoughts/past experiences?
I would consider hedging in a correlated instrument. For instance OEF vs SP, etc... 1 OEF point is roughly equal to 20.43 SP points.
If you are looking at the 2% case where a stop would not work, then the solution should be setup accordingly. i.e. If a stop limit with a huge limit will not work, then consider an option position at that huge limit, which should be close to out of the money. I would not get too extreme in practice, but the brainstorming phase can be...