Options Jive

Equity Cross-Product Hedging

| Nov 22, 2016
Up Next
    Options Jive

    Equity Cross-Product Hedging

    Nov 22, 2016

    We don’t believe in a “buy and hold” strategy. We firmly believe that when long a stock it makes sense to turn the position into a Covered Call by selling an out-of-the-money Call against it. This allows traders to lower their cost basis and reduce breakevens. Tom explained, “If you can buy a product for less than it's worth you're going to be better off. You are giving yourself a better chance of success than someone that has to pay full price for the same item. How do you do that? Well it’s quite simple, you just give up some of your upside.” When selling Calls, traders can fully hedge by selling an equal amount of Calls to their stock, under hedge by selling less or over hedge by selling more.

    Tom continued, “To take it one step further, what if I sold something in a separate product that was highly correlated? And what if one of these products had a higher Implied Volatility?” Apple (AAPL) has been in an uptrend since June. The issue is that when the December expiration was opened for trade the strikes were $5 apart. It is only recently that the $1 strikes in between have been added and they have much less open interest and therefore less liquidity. Implied Volatility (IV) is also low in AAPL. That means traders are receiving less when selling premium and selling less extrinsic value.

    Alphabet (GOOG) has a high correlation (0.93) to AAPL. It is a high priced stock which makes it attractive for selling premium. That high price means Naked Calls would have a high margin and the Buying Power Reduction (BPR) would hit hard. An alternative would be to sell Vertical Call Spreads as a cross-product hedge. A table of how to hedge 10% of a 1000 long share position in AAPL using GOOG Call Spreads was displayed. The table included the expiration and DTE, strikes of the short GOOG Call Spread, credit received, max loss (per spread), GOOG Delta (per spread), theoretical AAPL Delta and amount of GOOG spreads needed to hedge at least 10% of a long 1000 share position in AAPL.

    Tom noted, “You don't have to use GOOG for this. You can use something with tighter bid/asks like the liquid 1 point wide strikes of the QQQ which has a 0.75 correlation to AAPL.” Tom and Tony added, “You could do something funky like get long the Nasdaq and sell Russell Call Spreads against it. This will keep up your market awareness.”

    For more information on Cross-Product see:

    Watch this segment of Options Jive with with Tom Sosnoff and Tony Battista for the important takeaways and an explanation on how to use cross product defined risk option hedging in a correlated underlying to reduce risk and improve cost basis.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

    More like this

    tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

    tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

    tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

    tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

    © copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.