Stocks & Commodities V. 30:6 (60-61): Explore Your Options by Tom Gentile

Stocks & Commodities V. 30:6 (60-61): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

WHEREíS MY HEDGE?

If I put on a bull vertical spread, what can I do to hedge the position?

By either purchasing a bull call vertical or selling a bull put spread, you are starting out with a hedged position. Compared to an outright long call using the same strike for the purchased vertical or selling the same strike put, the trader is dramatically cutting down vega (volatility) and theta (time decay) risk. At the same time, desired directional risk is reduced but remains the crux of the spreadís ability to turn a profit.

Once you are in this type of position and you are showing a paper profit, further hedging using adjustments are possible. The most straightforward way of cutting risk down further and possibly ensuring a guaranteed profit would be to close down a portion of the existing spread if more than one contract were initiated. If a traderís outlook on shares remains intact and thereís still room for the spread to expand nicely before hitting its maximum profit potential, this type of adjustment is certainly appropriate to consider.




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