NQ hedge with QQQ call options

Discussion in 'Trading' started by garbo, Mar 8, 2003.

  1. garbo


    Could some of you experienced (options) traders give me some input on this idea?

    I've been playing the NQ futures for about a year and haven't blown my account yet (knock on wood...). I find my best gains usually come when I hold a short position overnight and the NQ gaps down during that time. Of course there is substantial risk doing that these days. The fast upwards movement that occurred at around 9:11 CST yesterday made that clear.

    What I'm thinking of doing is buying a little insurance policy in the form of 8 QQQ call options per NQ contract I trade. Since I only trade the short side, I assume if a big upwards movement occurs, those options will save my arse.

    I'm looking at April calls:
    April 2003 24 call: $1.65 ask ($1320 per NQ hedge)
    April 2003 25 call: $1.15 ask ($920 per NQ hedge)

    My idea is that until those calls expire, I can sleep better at night if I'm short. That also means I can trade in and out of my short NQ position with relative impunity.

    I have a few questions:

    1. Am I missing any obvious drawbacks to this strategy?

    2. Would it be better to buy deeper in the money calls or maybe LEAPS? Seems like if NQ drifts down over this time period the insurance value of the calls will decrease.

    3. Is there a better choice than QQQ options? I've looked at the NQ options but it seems like there is no liquidity.

  2. Remember if you buy LEAPS and they go very OTM, you no longer have a hedge and are just going to have to buy more options to hedge with.