Minyan Mailbag: Hedging
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
In general, when hedging a portfolio, is it better to use short dated options and continue to roll out or long dated options.
Await your answer and thanks for all your help,
There is no general application here: the primary consideration is prices.
When options prices are expensive, you want to go as short as possible and then roll out expecting volatility to come in (longer term options are more sensitive to rises in volatility). If options are cheap, go out longer; that way, if volatility rises you are already locked in.
Right now options prices on individual equities are very cheap. If you are thinking about buying a put for a specific event, go a little longer out to make sure your timing is right. If you have to roll, chances are relative put prices will be more expensive when you roll.
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