In general, if your hedging strategy does not prevent you from incurring large loss then you do not have a hedging strategy. In the event of a "flash" crash, if you have a protective put, you can exercise it and limit your loss. Or you can hold your positions and the put, in which case when the market recovers you have not experienced loss either.
From: Judson Wilson <[email protected]> To: [email protected] Sent: Sunday, June 19, 2011 11:56 PM Subject: Re: [JBookTrader] Re: Sterling Ratio performance metric On Sun, Jun 19, 2011 at 5:41 PM, Astor <[email protected]> wrote: >Generally, good trailing stop-losses or deep out-of-the money put would help >mitigate rare but significant events. It is more expensive to deal with a >strategy which has frequent smaller declines: cost of protective puts is >higher and/or stop-losses would be hit more often. Actually, the put option has drawbacks too - as does trading long and short side. I am worried that an event like the flash crash could happen again, and one strategy goes long at the top, and flat near the bottom, then the other goes short at the bottom and flat at the top. At the end I have a huge loss, and the puts haven't changed much (except for volatility value). -- You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en. -- You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en.
