QQQQ Hedging

Discussion in 'Options' started by nikko309, Feb 24, 2007.

  1. nikko309


    For many strategies (naked puts, spreads), when implied volatility is low, dollar wise, the risk is greater than the reward since premiums are lower.

    I'd like to investigate the concept of using the QQQQ which has a lower IV for hedging my naked put writing on some of its components. I realize that this hedge will not be exact since individual stocks that I write on have higher IV and fluctuate more than the diversified underlying. I'm looking to use the QQQQ as more of a catastrophic market hedge.

    Can you direct me to a source for add'l info or can you lay out some loose parameters as to how to determine how the hedge will perform based on current IV levels? TIA.
  2. Google "dispersion trading" and you'll find out a lot about this idea.
  3. Take this with a grain of salt................(1) If you're concerned about "disaster", reduce your position size to a more comfortable level. (2) Do some type of put-backspread with the index options initiated at a slight credit or break-even with 2 extra long-puts for each naked-stock-put that you have. A 1-by-3 or 2-by-4 would have enough extra "juice" in it to partially hedge your naked-puts during a "disaster".
  4. nikko309



    Thanks for the suggestion but I don't think that a backspread would accomplish what I'm after. It would not protect the component NP's much during the downslide to its long strike. Only a crash through that strike with a serious increase in IV would mean something but it would hardly offset the NP losses on the components. With index premiums being relatively low, long puts would be a better choice. Thx.
  5. nikko309


    Thanks. That's what I was looking for.