SPX Hedging with ES

What has been your experience hedging SPX options using ES? Say you have a Bear Call spread of 1200/1225 and the SPX is at 1198 with expiration (1) tomorrow morning at the SET and (2) tomorrow afternoon at closing. Depending on how you wanted to hedge, would you determine the correlation between the ES and SPX in order to determine where you would want to set your ES limit order at, somewhere below 1200 since the SPX>ES? Once your futures order was hit you would obviously have to manage it in the event its equivalent dropped below SPX’s 1200 level. Is this consistent with what others would do?

Hedging against the morning SET would probably be a little more intensive since you really don’t know at what point to exit the hedge since SET isn’t posted until the afternoon but generally you could probably exit ES once it hits its opening high (easier said than done I know).

Is it as easy as using 2 ES to 1 SPX? Not delta hedging but just hedging once the option is ITM or is delta the best route to take.

I know the easy answers would be to (1) just exit the SPX spread before you would need to hedge it or (2) to do spreads on the ES but I find the commissions to be to prohibitive on the ES options.

I have tried to search for what I am looking for without much luck but I know it has to be somewhere in past ET posts…

 

You can't hedge futures with cash because of the basis risk and settlement risk. You can use futures to hedge during the life of the SPX options but not going into SET. The best hedge for SET is take everything off. Adding futures will only compound your risk. You could get a huge spike on SET while the futures actually tank after the open. I think the SPY options are far better to trade then SPX because of the settlement procedure.

 

Mavrick is exactly right. I use ES cash to hedge ES options...works well, I also never hold the options to expiration. It is incredibly difficult on so many levels to trade the SPX...ES options have become very liquid and you can trade them just about 24/6. Much more friendly to the retail trader.

 

Thanks for the heads up guys. I don’t think the SPX SET will be an issue much longer for the weekly's at least since they are changing to a Friday PM settlement. But the issue would still remain for DJX and NDX, from the sounds of it though there isn’t much you can do in the hedging arena from Thursday close until Friday opening settlement.

 

those options don't expire until the print. you can hedge with futures as long as you plan on covering your futures on the cash opening. it can get messy since the print can end way out of line compared to where the futures had been trading.

 

Can we talk about this again (5 years later)?

According to CBOE, "as with other PM-settled index options, the exercise-settlement value is calculated using the last (closing) reported sales price in the primary market of each component stock. On the last trading day, trading in expiring SPX Weeklys closes at 3:00 p.m. (Chicago time)."

When they say primary market, does that include after-hours or not?

After hours trading on Fridays ends at 8PM EST.

ES trading on Friday ends at 4:15c (5:15 PM EST).

So is the major pin risk whatever happens in those 2 hrs 45 min between the time you take off your hedge and the time the markets fully close?

 

I actually do it the other way around, I hedge ES signals using SPY options when ES options are too expensive or bid/ask too wide or no volume where I need them. So you could certainly do it other way around.