This is a subject near and dear to my heart because I'm a particularly neurotic trader. As posted on another thread, I live in NYC and am forever afraid of another al-Queda attack or some other sort of geopolitical catastrophe and ensuing market collapse. The result is that I almost exclusively daytrade options which is not only costly in terms of commissions and taxes, but I've also lost or missed out on untold thousands of dollars on next-day gaps on strongly trending stocks. I don't think stops are worth a damn because almost all major news on any given stock is announced pre or post market, and there's no AH trading on options. So if you're long without protection, well, you're pretty much screwed. I've thought about staying long my positions with puts on the $SPX, but I haven't quite worked that out yet, and since I trade high-priced high IV options almost exclusively, buying puts at the same strike as my calls (a straddle) seems needlessly expensive and an almost guaranteed way to lmit my profits considerably. I trade large positions in same-month options on high-beta, high-volume stocks with, therefore, good spreads, and keep a constant eye on the $TICK chart and the S&P futures. This keeps me apprised of sell programs and other variables that almost always have a negative effect on the IV and options price (particuarly midday), but which are also almost entirely computer-generated arbitrage cash/futures spread trading that have nothing to do with my stock per se. So that limits the temptation to sell when these events occur. Anyway, how to hedge and hold overnight? That's my question.
don't hedge. close your positions at the end of the day. trading hours represent 9:30-4 M-F or 32.5 hours. Nontrading hours are 131.5. Don't hvae the exposure, and don't play with hedging stuff... If totally neurotic, then buy some well-diversified gold-mining shares. They were about the only thing that appreciated dramatically during the Great Depression...
Larry McMillan... the noted options author had a piece in Barrons witch made a good case why the SPX puts are not a good hedge for a broad based portfolio and the VIX options are. Pretty interesting.
It seems that a backspread would be best... the cost of the 2 long puts are covered by the 1 short put. Of course, it's critical to keep the positions about 1 strike apart (for the spy 2 strikes apart would be reasonable). Walt
Take a good trading stock, like POT last year, or SKF last fall. When the stock reached resistance, I bought puts a little under support (100 day EMA) as cheap disaster insurance, I agree with the original poster on the shakeouts. I bought 3-6 month puts because time decay was not too excessive and the insurance was cheap enough, and I sold them about 2 months out. Skf was interesting, when it crashed, it usually took 3-6 days and the puts shot up due to the IV increase. If you want extra insurance, buy a few lots a couple of strikes under support. I was trading FXP and when the trend broke in February, I sold the stock for a small loss and kept the put for a larger profit. Low beta or low volatility stocks, like KO or PG for the most part is a waste of money.