How to hedge futures contract without using an option?

[amiuser]

How to hedge future contract without using Option ?

 

[DeepState]

Re: How to hedge future contract without using Option ?

How to hedge future contract without using Option ?

...with the identically specified futures contract held in the opposite direction...?

This would novate the position and leave you flat on all Greeks.

 

[skc]

Re: How to hedge future contract without using Option ?

How to hedge future contract without using Option ?

Depends on what you are trying to achieve...

Say you are long Product A... You could
- Sell the same product A with a different expiry.
- Sell correlated products B, C (e.g. You are long ES and you sell some Russell 2000).
- Buy products that have inverse correlation to Product A.
- Sell the underlying of Product A (e.g. You are long SPI, you sell all 200 stocks in the XJO in the right weighting).
- There are probably other exotic stuff out there like warrants, binaries, ETFs etc etc.

 

[amiuser]

Re: How to hedge future contract without using Option ?

Depends on what you are trying to achieve...

Say you are long Product A... You could
- Sell the same product A with a different expiry.

I like your strategy. Could you please tell entry and exit rule to get profit in this Strategy ?

 

[Trembling Hand]

Re: How to hedge future contract without using Option ?

I like your strategy. Could you please tell entry and exit rule to get profit in this Strategy ?

There is actually very little you can do to get any sort of profit. Hedging is adding another level of complexity and extra transaction cost and another move that you are just as likely to get wrong as any trade.

 

[amiuser]

Re: How to hedge future contract without using Option ?

There is actually very little you can do to get any sort of profit. Hedging is adding another level of complexity and extra transaction cost and another move that you are just as likely to get wrong as any trade.

But do you suggest to trade naked futures without insurance ?

I am not comfortable with that. ........ I am looking for a conservative approach.....I'm willing to sacrifice little profit with a limited risk.


Could you please suggest how to trade futures with limited risk ?

 

[Trembling Hand]

Re: How to hedge future contract without using Option ?

But do you suggest to trade naked futures without insurance ?

I am not comfortable with that. ........ I am looking for a conservative approach.....I'm willing to sacrifice little profit with a limited risk.


Could you please suggest how to trade futures with limited risk ?

Yes, you use position sizing not hedging. Otherwise you are just going to take away the upside as well as the down side while adding transaction cost.

 

[amiuser]

Re: How to hedge future contract without using Option ?

Yes, you use position sizing not hedging. Otherwise you are just going to take away the upside as well as the down side while adding transaction cost.

I understand your point. ..... But position sizing wont help much in my case....because there are no micro lots ....lot size starts with big volume ....I can not control that part....so I am looking at reducing upside and also downside stuff.....but thats ok.

 

[skc]

Re: How to hedge future contract without using Option ?

But do you suggest to trade naked futures without insurance ?

I am not comfortable with that. ........ I am looking for a conservative approach.....I'm willing to sacrifice little profit with a limited risk.

Could you please suggest how to trade futures with limited risk ?

You limit your risk in futures trading by having a stop and closing a position when it reaches your risk limit! Hedging using any the methods I mentioned does not provide insurance... it merely provides an imperfect alternate to closing your original position.

A totally different strategy is pairs trading various futures. This is a different animal altogether and has nothing to do with "hedging" per se. It is also not necessarily a conservative approach. If anything it's more advanced and more difficult to master.

 

[amiuser]

Re: How to hedge future contract without using Option ?

You limit your risk in futures trading by having a stop and closing a position when it reaches your risk limit!

Fine .......but problem is , how do you protect yourself from overnight gap up/down risk with this ? I see this risk very high . stop loss order wont work here....Is there any workaround to this ?

 

[Trembling Hand]

Re: How to hedge future contract without using Option ?

Fine .......but problem is , how do you protect yourself from overnight gap up/down risk with this ? I see this risk very high . stop loss order wont work here....Is there any workaround to this ?

Sounds like you have too little an account to be trading the way you want to with the instruments you wish to trade. I am almost certain you have completely thrown out the window normal money management rules in trying to use futures.

Move down to CFDs they have contracts that match all the futs contracts on much smaller size.

 

[amiuser]

Re: How to hedge future contract without using Option ?

Sounds like you have too little an account to be trading the way you want to with the instruments you wish to trade. I am almost certain you have completely thrown out the window normal money management rules in trying to use futures.

Move down to CFDs they have contracts that match all the futs contracts on much smaller size.

did not like your comment......It did not answer to my query properly.

Thanks for your time anyway.

 

[CanOz]

Re: How to hedge future contract without using Option ?

did not like your comment......It did not answer to my query properly.

Thanks for your time anyway.

Actually i just opened a CFD account for my swing trading and it has a wide selection of contracts based on futures, but with smaller size. Quite handy for taking a view on something with a smaller account, like directional index bets. I wouldn't recommend it for intra-day trading, but its the ticket for swing trading as long as you have a proven trading method. Especially since IB has no margin available in Aust.

CanOz

 

[skc]

Re: How to hedge future contract without using Option ?

Fine .......but problem is , how do you protect yourself from overnight gap up/down risk with this ? I see this risk very high . stop loss order wont work here....Is there any workaround to this ?

Using any of the "hedging" approaches I mentioned would yield 2 possible outcomes.

1. The hedge works perfectly and it'd be no different as if you simply closed the original position... but with increased transaction costs.

2. The hedge doesn't work perfectly and you end up having 2 trades that you need to manage.

Neither of these achieve what you desire I don't believe.

 

[Trembling Hand]

Re: How to hedge future contract without using Option ?

did not like your comment......It did not answer to my query properly.

Thanks for your time anyway.

Well give us a specific example of a trade you would like to take.

What contract.
What entry price, target price and stop price or how much you would like to lose as a maximum loss and we can give examples of solutions.

the more info you give the more info we can give back.

 

[CanOz]

Re: How to hedge future contract without using Option ?

Using any of the "hedging" approaches I mentioned would yield 2 possible outcomes.

1. The hedge works perfectly and it'd be no different as if you simply closed the original position... but with increased transaction costs.

2. The hedge doesn't work perfectly and you end up having 2 trades that you need to manage.

Neither of these achieve what you desire I don't believe.

Depending on the market, the legging in can get you offside right away as well yeah?...Even with Auto spreaders.

 

[amiuser]

Re: How to hedge future contract without using Option ?

Using any of the "hedging" approaches I mentioned would yield 2 possible outcomes.

1. The hedge works perfectly and it'd be no different as if you simply closed the original position....

I wont be able to close the original position in gap up/down !!...simply I'll be crushed ....thats the point I was making ...because market is NOT open 24x7

sorry...I forget to mention that its not forex where 24x7 market is open .

I was talking about Equity futures....where gap up/gap down risk is very high ..may be earning report, news ...blah blah.....and I am doing Swing Trading

 

[sinner]

Re: How to hedge future contract without using Option ?

I wont be able to close the original position in gap up/down !!...simply I'll be crushed ....thats the point I was making ...because market is NOT open 24x7

sorry...I forget to mention that its not forex where 24x7 market is open .

I was talking about Equity futures....where gap up/gap down risk is very high ..may be earning report, news ...blah blah.....and I am doing Swing Trading

What the people are trying to explain to you is that if the gaps are large enough to crush you then your leverage ratio is too high for the current amount of capital you're trading with and futures are simply not an appropriate instrument until you have more capital.

CFD providers can offer you synthetic equivalents of the equities at much more granular position sizes (but it does come with an increased cost).

Most also offer "Guaranteed Stop Loss" features on their products that can protect you against gap risk (again, increased cost).

 

[skc]

Re: How to hedge future contract without using Option ?

I wont be able to close the original position in gap up/down !!...simply I'll be crushed ....thats the point I was making ...because market is NOT open 24x7

sorry...I forget to mention that its not forex where 24x7 market is open .

I was talking about Equity futures....where gap up/gap down risk is very high ..may be earning report, news ...blah blah.....and I am doing Swing Trading

OK. So you are looking for a "hedge" that you would essentially put on at the same time you enter a trade... Those suggestions I mentioned earlier were not intended for this situation.

The only potential avenues I can think of are options (which violates your thread title), guaranteed stops (as mentioned by Sinner) or something imperfect like long ES long VIX.

 

[ThingyMajiggy]

Re: How to hedge future contract without using Option ?

I wont be able to close the original position in gap up/down !!...simply I'll be crushed ....thats the point I was making ...because market is NOT open 24x7

sorry...I forget to mention that its not forex where 24x7 market is open .

I was talking about Equity futures....where gap up/gap down risk is very high ..may be earning report, news ...blah blah.....and I am doing Swing Trading

Depends what market you want to trade?

The likes of ES are closed for I think 1 hour in the morning(our time), which is about as close as you can get to around the clock trading. The ES having a huge gap and "crushing" you an hour later are fairly slim I would imagine, unlike European markets that close and re-open the next day etc.