I am trying to make a theoretical hedge to a bull call spread.

Here is the rationale: QQQ Bull Call Spread in near term, this is bullish qqq represents the nasdaq composite. FAZ long calls in back month to mitigate thetathis is bearish as FAZ is a 3x leveraged ETF albiet on the finance sector. FAZ will increase in value 3x for every 1 point move down QQQ makes.

Calls will get intrinsic value very quickly. For this site's sake, I'm not caring too much about the symbols. I am interested trying to find a cheap hedge that increases 3x faster if the other side of the trade fails.

Hughes Optioneering

Right now I almost have that, but not yet. How much of the hedge is held in proportion to the main trade. This simulation shows 10 bull call spreads, hedged by 1 long call in an inverse ETF.

The front month expires faster than the back month. The back month hedge can be closed before the effects of theta become apparent. But the further out you go for the back month, the most expensive it gets. The key is to get the shape of the risk profile to have a smaller dip into the negative at any point on the graph. I suggest searching all the possibilities using Excel. You have now reproduced the information contained in your Bloomberg plots pictured above.

You borderlands 2 easy money ps3 want to define a particular "utility function" cell for it to maximize, perhaps the peak profit or whatever else fits your personal desiderata. Start forex trading companies in kuwait solver with the best scenario you have established so far, and let it improve your utility function within whatever constraints you have set.

Obviously some hypothetical constraints will be impossible to satisfy, e. By posting your answer, you agree to the privacy policy and terms of service.

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Join them; it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. How to hedge a bull call spread. QQQ Bull Call Spread in near term, this is bullish qqq represents the nasdaq composite FAZ long calls in back month to mitigate thetathis is bearish as FAZ is a 3x leveraged ETF albiet on the finance sector.

The key variables to manipulate are: This simulation shows 10 bull call spreads, hedged by 1 long call in an inverse ETF Theta: But the further out you go for the back month, the most expensive it gets Expense: CQM 6 Sign up or log in StackExchange.

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