Hedging overnight Futures position using Options ?

This item was filled under [ Option Strategies ]

There are times when our day-trading position runs in profit and our stops is not hit till the close. As per our system, we might interpret the gap open in our favours and hence decide to carry this positoin overnight. At the same time, we don’t want to take unknown risk of Gap open so would like to hedge this position partially or fully by using options.

Suppose we are long on NIFTY and want to carry this Bullish position to next day. To hedge, we have to create bearish position. For this purpsoe, we have two choice, either buy Put or Sell Calls and craete bearish option position. Both are giving us protection against the fall. As a option buyer, time decay is working against us. .but as a seller, it works for us.

If NIFTYgaps up next day say 50pts then we will gain 50 on future and will lose lets say 25 on put assuming delta of 0.5. After market open, we can close the option position and take small loss and continue to run with our Long Futures position with appropriate stops management.

If it gaps down 50 then we lose 25 net. In such a case if feel there is further downside we sell the future hold the bearish position.

Basically by using above appraoch you are reducing the delta of futures long position form +1 to +0.5 by buying ATM PUT which has delta of -0.5. You can very well use ITM / OTM strikes to
leave overnight delta at value other then +0.5 say ( +0.2 or +0.8 etc)

Happy Trading

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