Protecting CFDs with options?

[makeorbreak]

I was hoping maybe someone could offer some insight about a theory...

Lets say for exmaple I purchased a $10,000 CFD @ 10% to give me $100,000 worth of promina shares at $6.70 totalling 14,925 shares. I want to set my Guaranteed stop loss at 5% (SP$6.365).

I then want to protect my shares by buying some 14 or 15 put options at $6.76 december expiry.

Should the share price go to $7.60 I may have lost a couple thousand dollars but woo hoo cause I have made more than that....

But... Should the share price fall below $6.35 I have the right but not the obligation to sell my shares at $6.76. If I have been stopped out, (Iknow this sounds kinda strange) but do I still have the right to sell my hedged shares at $6.76 even though they have automatically been sold off???

 

[wayneL]

Re: Protecting CFD's with options

I was hoping maybe someone could offer some insight about a theory...

Lets say for exmaple I purchased a $10,000 CFD @ 10% to give me $100,000 worth of promina shares at $6.70 totalling 14,925 shares. I want to set my Guaranteed stop loss at 5% (SP$6.365).

I then want to protect my shares by buying some 14 or 15 put options at $6.76 december expiry.

Should the share price go to $7.60 I may have lost a couple thousand dollars but woo hoo cause I have made more than that....

But... Should the share price fall below $6.35 I have the right but not the obligation to sell my shares at $6.76. If I have been stopped out, (Iknow this sounds kinda strange) but do I still have the right to sell my hedged shares at $6.76 even though they have automatically been sold off???

You can do that.

But you are costing yourself two sets of commissions for one position. What you have with 15000 PMN + 15 put options, is a synthetic call option position.

You need only buy 15 calls of the same strike as the proposed puts to precisely duplicate what you propose, get the same risk profile, use less capital, and cost yourself less commish.

Cheers

 

[makeorbreak]

Re: Protecting CFD's with options

So what you're saying wayne is that my theory would work only if I was already profiting in the CFD position.

As in buy a cfd @ $6.70, if share price goes to $7.00 buy a put @$7.00 exercise to protect any fall right???

 

[wayneL]

Re: Protecting CFD's with options

So what you're saying wayne is that my theory would work only if I was already profiting in the CFD position.

As in buy a cfd @ $6.70, if share price goes to $7.00 buy a put @$7.00 exercise to protect any fall right???

Well thats a different proposition, as you would be legging in.

I'm not trying to tell you what you should do, just to be aware of what you are doing.

When you introduce options into the mix;

1/ Be aware of synthetic positions. There is often a pure option play that will achieve the same goal: Be aware of the relationship between puts and calls. A put IS a call when you add or subtract stock (or derivative of... CFD SSF whatever)

2/ You are mitigating some risk, but there is always a trade-off with risk in some other form that shows up via the Greeks. In this case, time, time decay (theta), volatility risk (vega) reduced delta etc.

It's about being aware of what risks you are taking on so you can judge whether these new risks are acceptable or not.

 

[makeorbreak]

Re: Protecting CFD's with options

Useful!!!

Thanks wayne.

 

[sails]

Re: Protecting CFD's with options

.... But... Should the share price fall below $6.35 I have the right but not the obligation to sell my shares at $6.76. If I have been stopped out, (Iknow this sounds kinda strange) but do I still have the right to sell my hedged shares at $6.76 even though they have automatically been sold off???

Makeorbreak, I'm not aware of any brokers that would allow the exercise of puts to effect a sale of CFD's as they would be in two separate accounts. However, you can always sell your puts and receive any cash value that way.

 

[makeorbreak]

Re: Protecting CFD's with options

Thats what i thought sails.
I asked my broker today at macquarie and he reckons it can be done.
He said it would be messy though. Whatever that means.