Hi
I am new to options. I am wondering if hedging strategies really work for American type options. Consider the following scenario.
Sell SBI PUT : 1800
Buy SBI PUT :1600
CMP of SBI as on 02-Dec : 2000
With this trade i calculate the max risk as Rs 200 (1800-1600).
Assume that SBI drops to 1500 (closing price) on 03-Dec and my Sell PUT option is assigned . So my loss now is 300. So i decide to exercise my Buy option but i can do it only on 04-Dec as i came to know about assignment after market close.
However SBI rebounds to Rs 1900 and closes at that price on 04-Dec and so my exercise is rejected. So my loss is 300 which is more than what i expected (200).
It appears to me that hedging strategies may not work for American type options due to time delay in exercising hedging options.
Any thoughts?
Raj
I am new to options. I am wondering if hedging strategies really work for American type options. Consider the following scenario.
Sell SBI PUT : 1800
Buy SBI PUT :1600
CMP of SBI as on 02-Dec : 2000
With this trade i calculate the max risk as Rs 200 (1800-1600).
Assume that SBI drops to 1500 (closing price) on 03-Dec and my Sell PUT option is assigned . So my loss now is 300. So i decide to exercise my Buy option but i can do it only on 04-Dec as i came to know about assignment after market close.
However SBI rebounds to Rs 1900 and closes at that price on 04-Dec and so my exercise is rejected. So my loss is 300 which is more than what i expected (200).
It appears to me that hedging strategies may not work for American type options due to time delay in exercising hedging options.
Any thoughts?
Raj