Stocks & Commodities V. 28:3 (60, 66): Explore Your Options by Tom Gentile

Stocks & Commodities V. 28:3 (60, 66): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile


What do you think about hedging directional risk of a vertical spread with stock?

That’s an interesting question, but one without a “one size fits all” answer. Hedging delta risk and possibly taking advantage of this position type’s potential long gamma rests with the trader’s objective, risk tolerance, and whether he or she maintains account restrictions regarding this type of hedge and net positioning.

When a trader has some type of vertical on, the position is already hedged to a large extent by the other short or long contract. Depending on how close the position is to the underlying, time remaining, strike distance, and volatility, the hedge may be more or less effective than it had been prior to when the position was established. Nonetheless, the vertical spread does afford the trader a net contract–neutral position.

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