I am trading US and Canadian Stocks EOD... I am holding the positions between 1 and 10 days and I am positioned long and short. I hold between 10 and 40 positions at a time... However, since those stocks a greatly correlated to the overall market the diversification of the portfolio is rather diminished... I am always trying to balance the portfolio with long and short position to be "safe" when for example the market crashes severly overnight... However since in a bull market it is difficult to find good shorts and vice versa for a bear market I am often positioned rather one way... e.g. 20 Longs and 10 Shorts - or 80K Long and 40K short... So i would be still +40K at risk when the market gaps down huge overnight... Since I have only basic knowledge in options I wanted to ask if it makes sense to hedge the portfolio with for example a Long Put on the SP500 or Nasdaq etc... Or some Spread to reduce the costs of the hedge... However, since the hedge would be rather short (considering the average holding time of a week) I am wondering if this can be done in a meaningful way considering the different factors which influence the option price... Btw, would it be possible or make sense to use exclusively options to "Swing" trade stocks? thanks a lot
I cant help you as I am not at all well versed in options. I can suggest you Check out the writings of Phil Davis on seekingalpha.com. This seems to be his specialty. Look forward to the responses to your question on this forum.
I will leave it to those better qualified to advise you on the technicalities of this. I have looked into this from a purely practical perspective. Hedging in this fashion is buying insurance, so you pay for the privilege. If your stock portfolio gains, your put will lose value. If your stock portfolio goes nowhere, your put will lose value due to theta decay. So, from a purely business perspective, the question I asked was whether it was worth the money. I looked into this for futures contracts, specifically the CL contract, and concluded that for me at least, it was not worth it. Using a stop made more sense. But many funds do hedge in this fashion because with size, getting out at the drop of a hat is not possible. For them, it must make sense financially. I would suggest that regardless of the advice you get, and I am looking forward to that, do some theoretical hedges and see if it makes financial sense. As long as you are not setting up for death by a thousand paper cuts, it would be nice to have portfolio protection from a market plunge.
if you're time period is 1-10 days try using the front month contract with at least 10 trading days til expiry. consider putting 1-5% of your position in puts 5-10% otm. it obviously is much cheaper now to hedge w/ the vix in the low teens than when just after the market crashes and it's at 30. if you want to roll the dice and hope (b/c that's what you're doing when you're not hedged at all) that nothing bad ever happens again in the markets then just be ready to wake up one morning and see you're account cut in half.
thanks for the answer... however since i have only basic knowledge could you give an example? this would be great..