BIG BANG Insurance

[vetten]

hello folks,

how to insure your long portfolio has been debated in a few threads and some solutions
were:
1. have a long and short portfolio
generally the short portfolio trades at break-even or at a small loss, but its there to insure
the long portfolio against any dramatic falls
nevertheless it will tie up a large part of your trading capital

2. buy an out of the money put
generally quite expensive in the long run

now my idea is as follows:
why not place a short on the DOW (or an other index) say 100/150 points away (in futures, options etc etc) and short enough to cover the falls in the long portfolio.
I would have to change my short daily to reflect the change in the DOW for 5-7 years from BANG to BANG, but when the BIG BANG comes I`m covered.
Quite a bit of work, but at least I dont have to own any costly insurance.

Am I so brainy or am I missing something?????????

 

[vetten]

is nobody ready when the crash comes?

 

[Rogueman]

is nobody ready when the crash comes?

Of course you can place a short on the future. But then ur only hedged from 100/150 points down. (I assume that's where you want to place your stop loss). But thats the same essentially as selling your portfolio, so thats not hedging.

And which options would you like to short? ITM Calls? OTM Calls?

 

[vetten]

Of course you can place a short on the future. But then ur only hedged from 100/150 points down. (I assume that's where you want to place your stop loss). But thats the same essentially as selling your portfolio, so thats not hedging.

And which options would you like to short? ITM Calls? OTM Calls?

hello Rogueman,

thanks for your reply.
I would take out more contracts to make up for the shortfall of those 100/150 points.
when a crash comes, I wouldn`t be able to sell my trading stocks and that`s why I need a hedge.
If I place a stop sell order on a future contract about 200 points away, what is the percentage of the full value of that contract that I would need to have in my account to be able to place this order? Do you know?

thanks Rogue

oh btw I would choose the otm option far away, cos that seems to be the cheapest form of cover. dont know the ins and outs yet.
just looking for an authoritive article on the subject with a good worked-out example.
wonder why not more people want protection: doesnt seem to be a poplular subject.
but then only a small percentage of traders are winners!

 

[Rogueman]

hello Rogueman,

thanks for your reply.
I would take out more contracts to make up for the shortfall of those 100/150 points.

> But then still, untill that point you are not hedged. Futures have delta 100, remember.

If I place a stop sell order on a future contract about 200 points away, what is the percentage of the full value of that contract that I would need to have in my account to be able to place this order? Do you know?

> This fully depends on your bank/broker. Futures are marked to market daily, so only the daily DIFFERENCE is booked to your account, NOT the intrinsic value of the total future, in contrary of with options. So then your bank/broker looks at the usual 1-day likely movement, and according to that sets a margin requirement. They will probably not look at your stock position as underlying, but only the cash in your account.