Limiting position risk w/o stops

Discussion in 'Index Futures' started by TraderD, Apr 30, 2004.

  1. TraderD


    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...

    Any thoughts/past experiences?
  2. ktm


    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.
  3. TraderD


    Yes, of course. My question pertained to practicality of such strategy, caveats etc.
  4. spyders and es futures are highly correlated ... use them to offset each other.
  5. Luto


    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...