Question to Institutional and Fund Traders on hedging

Discussion in 'Trading' started by sups, Nov 6, 2008.

  1. sups


    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)?

  2. ctheo1


    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.
  3. 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.
  4. bidask


    if there's no perfect hedge, then why not just reduce the size of the long position?
  5. sups


    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.
  6. ctheo1


    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
  7. 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!