Hedging with the Optimizer

Well, the system ate my post :) so here it is again.

When using the optimizer to design hedges for existing positions first figure out the kind of move you want to protect against. This is very similar to a normal optimizer session, just pick duration (a week, months etc) depending on how long you want to carry the hedge. In direction of the move pick the one that makes the hedge make money. And for the move itself just depending on what you want to accomplish pick the correct move, for instance a catastrophic hedge is >20% move, or use any other values that you think the underlying can move against you.

Once you have the best option for the move, write down the total return and get the cost from your trading software. Then to compute how many of those you want do the following:

size = Required Profit /(cost*100*(return/100+1))

The required profit is the amount of dollars you want to make with the move. Hopefully this can be useful.

Leo Valencia hosts the Gamma Optimizer options service at ElliottWaveTrader.net.