I’m forgetting my curriculum a little, just want to make sure my thoughts are correct: Say I want to hedge $450,000 of equities against a 15% decline. Current SP500 at 1,070. 15% decline will result in approximately SP500 = 900. The number of put options contracts I will need = 450,000 / (900*100) = 5 contracts?
Initially, you have 450,000/1070 = 420.56 shares of SPX. So, you need about 420 put contracts (divide by 100 if you are including the share multiplier). The problem with your second calculation is that you are still using 450k as your position value. If the SPX declines to 900, your position value will also decline.
what’s the delta of the protective put of your interest? How can you hedge without providing the delta of the option that you use as a hedging tool before any calculation? or alternatively you can hedge with futures (delta one) to hedge then you can save yourself the dynamic hedging going forward. For this siimplified example, you can use either the ES (e-mini S&P) or SP (big S&P) to hedge which are the same except for the multiplier, 50 and 250 respectively. Say if the e-mini is used: A contract value is 50*1070 = 53500, and 450,000/53500 = 8.41 which is abt 8 or 9 contracts that you need to short to hedge. that is, irrelevant to the % of decline you can expect.
lkwan4 Wrote: ------------------------------------------------------- > what’s the delta of the protective put of your > interest? > How can you hedge without providing the delta of > the option that you use as a hedging tool before > any calculation? > exactly (so sad, I spent 2 hours just last night covering delta hedging for L3. fml)
I don’t think he is trying to delta hedge the position. He just wants to limit his loss to 15%.
OP: your question is a bit imprecise. How long do you want to hedge your downside? What part of the downside do you want to hedge, the first 15% only or everything below that? Either way, you could buy puts on ES / SP futures. Say you’re worried about a decline greater than 15%. You’d calculate the strike based on 85% of 1070. You’d buy enough puts to cover your position size, struck at 900, for whatever expiry you require.
Delta relevant if you’re trying to hedge your OPTION, not trying to hedge the UNDERLYING STOCK. If he were selling the put, then delta is very important. All he wants to do is make sure that if S&P goes below 900, he maxes out his loss there.
bchadwick Wrote: ------------------------------------------------------- > Delta relevant if you’re trying to hedge your > OPTION, not trying to hedge the UNDERLYING STOCK. > > If he were selling the put, then delta is very > important. All he wants to do is make sure that > if S&P goes below 900, he maxes out his loss > there. ever heard of the strategy “protective put”?? It can go 2 ways…hedging underlying with option, or hedging option with purchase/selling of underlying.
PLS IGNORE THE DUPE!
lkwan4 Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Delta relevant if you’re trying to hedge your > > OPTION, not trying to hedge the UNDERLYING > STOCK. > > > > If he were selling the put, then delta is very > > important. All he wants to do is make sure > that > > if S&P goes below 900, he maxes out his loss > > there. > > > ever heard of the strategy “protective put”?? It > can go 2 ways…hedging underlying with option, or > hedging option with purchase/selling of > underlying. Hmmm… protective put… can’t say that I’ve ever heard of that strategy in my entire life. Is that when you put a jar of peanut butter in the pantry just in case the town gets nuked? If the guy is trying to buy and sell the underlying in order to create a synthetic put option, he’s certainly NOT going to be asking how many contracts he needs to buy. He’ll just go and start selling his shares as the price drops.
Bchadwich, there can be many reasons why a stock needs to be hold in the portfolio even though it is expected to decline in the near-term. For example, the stock position may gain the owner a controlling interest in the company and as such sale of the stock is not possible, or the stock is used in a swap and as such cannot be sold, or as simple as tax or administrative reasons…etc “If the guy is trying to buy and sell the underlying in order to create a synthetic put option, he’s certainly NOT going to be asking how many contracts he needs to buy. He’ll just go and start selling his shares as the price drops.” To be honest, I am not quite sure abt your quote above and appreciate if you can elaborate.
I think you are making this far more complicated than it is…
Hello Mister Walrus Wrote: ------------------------------------------------------- > I think you are making this far more complicated > than it is… Reading comprehension is not this forum’s strong suit.
Hello Mister Walrus Wrote: ------------------------------------------------------- > Initially, you have 450,000/1070 = 420.56 shares > of SPX. So, you need about 420 put contracts > (divide by 100 if you are including the share > multiplier). > > The problem with your second calculation is that > you are still using 450k as your position value. > If the SPX declines to 900, your position value > will also decline. Only thing I would like to add is your investment time horizon. Are you going to hold for more than a year (buy LEAPS) or a couple a months? Your hedge will only last till the option expires, so either you keep on rebuying the puts as they expire or just buy a LT put now but other than that pretty agree with Walrus BTW most contracts come in 100 share blocks so you will need 4.2 or round up to 5 since you don’t want to lose more than 15%
Though if your position is a going concern, the best strategy to limit your loss to 15% would probably be to sell when the SPX declines by 15%.