A Lesson in Hedging
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home | Options Trading Archive | A Lesson in Hedging

A Lesson in Hedging

Henry Gambell
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As you all well know, I'm bearish going into the end of the year. Over the last two days however, these bearish positions have taken a beating. I'm hoping to catch some relief at the resistance levels we ran into on Thursday, but only time will tell.  The market opened almost perfectly flat, but has rallied a few points at the time of this post. Here's the play I'm looking to initiate if we have another rally today and get above  yesterday's high of 109.94 in the SPY. Once we hit 110.00 I'll be looking to buy the 110 August calls, this hedges me in my December puts. You may ask why not just close out my December positions and wait for a re-entry? The basic answer is so I'm ready for the decline. If you look at the rally from June 8th to June 21st, you'll see it was quite powerful, but fell off that cliff into July 1st even more quickly. Rather than try to buy until the peak, then sell at the peak, I'll hedge until we're able to get a sell off, then I'll be ready.

All charting provided by Trade Station.
Position at time of post: Long December Puts, I'll be long August calls as well if SPY trades above 110

 Symbol SPY
 Action (Buy to open/Buy to close/Sell to Close) Buy to open
 No. of contracts (where applicable)  
 Expiration month August 2010
 Strike Price 110
 Type (Stock/Call/Put) Calls
 Trade price SPY MKT @ 110.00
 Spread (better than/none) xxxxxxxxxxxxxxx
 Position? Buy To Open

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