While it is quite normal to hedge stocks by selling options during an up move, one could very well also hedge stock futures or index futures by selling ( that is, writing) options, in both bullish and bearish market conditions.
Hedging by writing options against futures works best if you are trading index futures, like the E-mini Dow futures or the FTSE 100 or the S&P CNX Nifty 50 futures. Since index options are more liquid compared to stock options, it is far easier to write index options. In fact, you might even hedge index CFDs or index ETFs with options.
In bullish market conditions, long index futures should be hedged by selling out-of- money call options (OTM options), and in bearish market the short index futures could be hedged by selling out -of - money put options. But then how does one select the right OTM strike to sell in either case?
This is where the option delta comes in. The best bet would be to select a strike that has a delta of 0.382 ( in the case of a put option, a delta of -.382, but that negative sign is just a notation for put options deltas). Such a delta gives enough of a room to make reasonable profits on the upside ( or downside, in a bearish scenario), while also affording a good enough stop-loss in case market reverses direction. The premiums received on the options must justify that stop-loss which you think should hold for the index, and so make sure that the expiration date for the options contract is at least 21-34 days ahead.
The implied volatility for the options can also a criterion for selling the right strike. It is always prudent to sell higher implied volatility, and so besides the delta, you might also check if the next strike offers higher implied volatility, which is merely an indication that the option is priced expensively. A skillful trader would obviously sell expensive options. A lower implied volatility than usual would offer lower premium that may not justify the stop-loss on the index futures.
For actual trading strategies playing out now, visit my website at NIFTYTRACKER.com .
More in the books on "The Simplified Futures and Options Trading Strategy" and "The Fibonacci Dictated Trading Script" ...
Hedging by writing options against futures works best if you are trading index futures, like the E-mini Dow futures or the FTSE 100 or the S&P CNX Nifty 50 futures. Since index options are more liquid compared to stock options, it is far easier to write index options. In fact, you might even hedge index CFDs or index ETFs with options.
In bullish market conditions, long index futures should be hedged by selling out-of- money call options (OTM options), and in bearish market the short index futures could be hedged by selling out -of - money put options. But then how does one select the right OTM strike to sell in either case?
This is where the option delta comes in. The best bet would be to select a strike that has a delta of 0.382 ( in the case of a put option, a delta of -.382, but that negative sign is just a notation for put options deltas). Such a delta gives enough of a room to make reasonable profits on the upside ( or downside, in a bearish scenario), while also affording a good enough stop-loss in case market reverses direction. The premiums received on the options must justify that stop-loss which you think should hold for the index, and so make sure that the expiration date for the options contract is at least 21-34 days ahead.
The implied volatility for the options can also a criterion for selling the right strike. It is always prudent to sell higher implied volatility, and so besides the delta, you might also check if the next strike offers higher implied volatility, which is merely an indication that the option is priced expensively. A skillful trader would obviously sell expensive options. A lower implied volatility than usual would offer lower premium that may not justify the stop-loss on the index futures.
For actual trading strategies playing out now, visit my website at NIFTYTRACKER.com .
More in the books on "The Simplified Futures and Options Trading Strategy" and "The Fibonacci Dictated Trading Script" ...
