Lets say you have a huge long equity position and you want to hedge that position. Do you or your firm normally hedge with way in-the-money Puts, at-the-money Puts, out-of-the-money Puts, or do a combo sell Calls and buy Puts? How far out do you normally go out in terms of expiration (1-month out, 2-months out, LEAPS)? Thanks.
unfortunately the answer is it depends. it depends on the firm, it depends on the position. also remember, the only perfect hedge is in a garden in japan.
I personally wouldn't be worried about their hedging strategies, as they obviously don't work these days. To put it simply - most of their systems are broken for now.
It's just an FYI for me to get an idea of how a fund or institution would go about in the process of hedging a position from real world experience and not just theoretical. Forgot to also ask, if you knew you wanted to put on a big equity position would you ever start with the hedge first (ie: buying the options first) and then start building the position. Thanks again.
it is usually a lot more complicated than that. within a bank there may be different desks with different budgets and risk tolerances eg. a market making desk and a prop desk. their priorities are clearly different. both however, get their approvals from risk as the firm monitors risk on a global basis. if you add the internal and external politics that sometimes come into play then you can see why it is not a straighforward answer.....obviously a lot of the tools you mentioned would be part of the "arsenal". things are simpler for entities that have less fingers in less pies so to speak. for example, a long only equity fund. i hope you see the point
It really is a "depends on the position" situation here. Mainly your Time Frame. If you playing the long side short term 1day-1month Hedge with a 2-3month put. (so you dont get crushed on the final month of Time Decay) General Hedge ideas- I hedge by buying Just OTM puts and/or by going long some inverse ETFs. If you taking a new position and you want it hedged ALWAYS take the Hedge First!