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I don't think you will find MES options to be liquid on a Sunday evening. Last time I looked, the spread was massive (like, 5-10 points) compared to ES which was fairly tight.
If you hold an ITM put at expiration, and you're already long, your position will simply be reduced. For example, if you're long 3 MES and you're long 2 puts at expiration, you'll be long 1. But, there's no need to do this; you'd almost always simply close your hedge and adjust your position before expiration.
I'm not sure about how AMP will do the margin. They're not very sensible about margins. Other brokers do utilize SPAN margin and give you reasonable margin requirements. For example, if you sell an OTM put, your margin is $X. If you sell a put spread instead, selling that same put but buying one lower to limit your downside risk, your margin requirement should be less, not more, obviously. So, a sane broker should not require any additional margin to hedge a position when that hedge is buying puts/calls, because your hedge reduces your exposure.
Your expiration should be commensurate with the time frame of the trade. If this is a trade you'd like to hold for a while, buy an option 20-30 days out. This way you're not paying too much for theta decay, which intensifies greatly over the final week or two of an option's life. If it's truly a weekend hedge, maybe buy the options one week out.
Select your strike based on how much you want to hedge. If you're up 100 points and you want to lock in 25 points, buy the put that's OTM 75 points. Generally to hedge, you want a cheap premium and so you'd go further OTM.
Also, consider whether you actually need to hedge. Maybe you're better off to close on Friday, and just reopen on Sunday. Do some quick research and see how much the weekly gap is in ES (Friday close to Sunday open). I expect it will all come out in the wash by just getting flat. That is, sometimes you may lose a few points, sometimes you may gain a few points, but you never pay premium. And as mentioned earlier, be sure to check liquidity in MES options at the globex open every day and see how big that spread is, because by the time you pay some premium on Friday, lose that plus the spread on Sunday, you'd probably have been better off to just get flat.
Finally, while your preparation here is commendable, your first order of business is actually getting into these profitable positions which you need to hedge in the first place. Be sure that your focus isn't so much on hedging that you neglect the actual trade itself.
Yes, you would have to consider that Sunday evening. If you can't get out at a reasonable price then, you may well have to wait until the day session to exit.
Correct, but when it comes to a partial weekend hedge, I would not do something like that; doesn't make sense to me. It would always be 1:1... one option contract to hedge one futures contract.
Haven't really hit AMP with any margin questions yet. So remains to be seen. However, if margin is required at the time of option purchase, that would not be good.
I don't think a weekend hedge would necessitate an expiration more than a week out. In fact, it looks to me like a Monday expiration would be ideal. Unfortunately, those are only available on ES. At present, MES weeklies expire on Friday.
Correct. I believe that is what I indicated in one of my previous posts.
Flattening your position is always an, err... option.
As far as gaps go, I am not too concerned about that. I only want partial protection against major price shocks. As I recall, last year, there were numerous times the market tanked on the Sunday open. This year, I don't think it has happened once. However, when it does happen, and it will eventually, without at least a partial hedge, it could be very painful, depending on how may contracts you have in your position.
And out on Friday and back in on Sunday? You would be doubling your commissions and fees every week. However, if that looked to be the logical course of action, then fine.
All the variables have to be weighed.
That goes without saying. This is all preliminary research.
* You said that you want "partial protection against major price shocks" ... well, that's precisely why you'd only partially hedge and own fewer puts than your position. Additionally, there are multiple ways to do it. If you were long 2 MES, instead of buying 2 OTM puts, perhaps it's cheaper to buy 1 ATM put.
* Your commissions and fees will be the same whether you flatten and reopen, or buy and close a put position. The difference is that you will avoid paying premium and decay, while risking that perhaps you'll miss some upside if the Sunday open is a big gap up.
* You said that "it looks to me like a Monday expiration would be ideal" -- I don't know if you missed the point about the nonlinear theta decay or not, but whatever your reasons, do the math and be sure that your reasons make sense. I'm giving one reason why buying very short dated options may not be the best idea; namely, you're getting short theta when it's decaying the fastest. You need to consider the IV across multiple strikes and expirations. For example, if you buy a put dated 1 week out (your only option on MES at times), and Jackson Hole is next week, then you're going to pay a premium for that event vol. It's likely that the IV is relatively lower for the option 2-4 weeks out. These are things you should consider.
Options can be incredibly complex, and even a simple hedge like you're talking about has many ways to execute it (consider a collar, that is, writing an OTM call to finance your hedge, for example).
Although I haven't traded options, I've read a lot and have a "general" understanding of theta, delta, and IV. So, yeah, I hear you, options are extremely complicated. You've definitely given me more to think about, but I don't really have time to respond tonight. I'll let your points bounce around my head a bit and will respond again tomorrow.
The reason I am doing preliminary research is to determine whether there is a reasonably simple, reasonably inexpensive, and reasonably effective way to protect a long futures position held over the weekend. However, under no circumstances am I interested in becoming an options trader; therefore, I am not really interested in learning complex options strategies. So if it's more complicated than buying a put, then I probably don't want to go there.
That said, I was only looking into two possibilities: 1) Going into the weekend flat, or 2) Buying one OTM put to protect one futures contract.
As mentioned, I only want a partial hedge to protect against a major price shock. My thinking was to protect against a 50+ point drop at the Sunday open. Now if the open equity of my position was less than 50 points, I would simply go into the weekend flat. Otherwise, I would buy a put with a strike 50 points lower than the futures price.
However, your point about buying fewer ATM puts might actually be less expensive than buying an equal number of OTM puts is something to consider. However, a quick check of ES shows the last trade on two OTM puts 50 points lower would actually be less expensive than buying one ATM put, but your suggestion is definitely something to check before making a decision.
Right. Buying a put would generate approximately the same commissions and fees as closing and reopening. That was a “duh” moment for me!
As far as which expiration: When I said it looked like a Monday expiration would be best, I was focused on a scenario where it might look preferable to hold until expiration and settle into a short futures position.
Having given that more thought, it seems there are two things to consider about expiration choices: 1) When trading out of a put, it seems a longer expiration would be preferable, or 2) When holding a put until expiration, it seems a closer expiration would be preferable.
For example, and in general:
Given a “normal” Sunday open, it would be easier to sell the put if there was more time left. And that put would lose less of its value over the weekend, assuming IV hadn’t jacked up the premium on Friday, so the hedge would end up more affordable. And speaking of IV, if IV were too high and/or the skew was unacceptable, then going into the weekend flat would be preferable.
However, if the bottom fell out at the Sunday open, it seems it would be better to have a Monday expiration so you had the option of selling the put, or holding to settle into a short futures position.
So where is the sweet spot? I have no idea! I’m only in the beginning of trying to get my head wrapped around all this. If things get too complicated, I’ll just go into the weekend flat.
Again, thank you for taking the time to respond. I have a lot to process over the next week or so.
Have you tried asking AMP? I got more help from them one time about Sierra Chart then I got when I left a question for Sierra Chart.
I know they wouldn't help with the Denali feed, that is through Sierra Chart, but they might help with anything possible with CQG. I guess specifically, I'm thinking they could answer the question of whether or not you are getting all that is available or if there is something you are not doing correctly.
AMP's email support has taken a turn for the worse. I contacted them last week to find out what I needed to do in order to buy options on ES/MES. They answered what they wanted to answer and ignored the rest. I filled out and submitted the options risk disclosure form middle of last week, but haven't heard anything. I sent them a message Friday asking if I was approved or whether I had to wait for an email and they just ignored me. I am really surprised because I have had excellent experience with their support in the past.
When I find out whether I am cleared to buy options, I will ask them about the missing MES options in SC.
