Hedging Futures with options

#1
There are many option trading strategies where one can hedge one's position. Is there any similar trading strategies for Futures ?

If one has shorted one lot of Nifty Futures and would like to hedge with calls - how do you calculate the call strike price and the number of lots one needs to buy.

Are there any books with deal with this subject ?

Also would like to know what dynamic hedging is all about.


Thanks in advance.
 

AW10

Well-Known Member
#2
Check out this link that I posted sometime back on this topic.
You can replace portfolio size by nifty futures position value.
Delta value for futures can be taken as 1.. ie for each Rs movement in NIFTY, the futures also move by 1 (in reality it is slightly different ),

http://www.traderji.com/options/20630-option-trading-hedging-loss-portfolio.html#post176768

To understand Dynamic hedging, you got to understand lot more about the behaviour of Delta with respect to the movement in the price of underlying.
Delta is roughly 0.5 for ATM option. But as option gets into ITM or OTM,
the delta value also change. The option greek - Gamma helps in assessing this change. So as delta changes, the hedge ratio calculated above (1:2 or 1:4) will also change. As a result of this movement, the position that was fully hedged may get exposed partially. Thats when we need to buy /sell options to bring delta back to 0. In simple term, Dynamic hedging is
continuously monitoring the hedged position and taking corrective action.

This all is theory, in practice you got to consider brokerage, slippage in bid ask, time decay on option position etc as well. Tradeoff is go ahead and put simple Stoploss order and cut the risk. That will not protect u against Gap up/ Gap down. .. But statistically, we don't have many months like Oct-08.

Hope this helps.
 

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