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At 10:51 PM +0200 7/4/01, MikeSuesserott wrote:
>It's true! Usually it is neither desirable nor advisable to go long an S&P
>futures contract and hedge this exposure by purchasing an S&P Put option.
>Why? Because the very same market position can be established by simply
>buying an S&P Call.
>
>These two positions are totally equivalent, including delta, gamma, time
>decay and all. And yet, in the first case S&P initial margin plus put
>premium will bind about $7,600 of the trader's capital, while the (totally
>equivalent) call position can be established for only $4,200, and even saves
>one trade's worth of commission and slippage.
This is true if that is all you are doing. (A Long plus a Put is a
"synthetic Call", identical in all respects except for commissions).
But if you are trading the long SP position in and out several times
a day, you can leave the portfolio insurance "Put" in place most of
the time and this allows trading in the high liquidity futures market
while keeping the low liquidity insurance policy in place.
Someone else mentioned that placing a sell stop in the Globex market
is also pretty safe since they are filled on a first-in/first-out
basis and are highly likely to be filled if the price drops through
your stop price in the middle of the night (unlike in the SP pit
during the day).
Clearly, a position you are already in is still safer than getting
filled on a stop but I guess it depends upon how safe you want to be.
The point is that it is dangerous to take any gamble that you cannot
afford to lose, no matter how unlikely. And I am amazed at all the
people who do it routinely...
Bob Fulks
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