OptionTradingpedia.com "Your FREE Options Trading Encyclopedia"
| Blog | Advertise | Tell-a-Friend  

Home Home | OppiE Community of Option Traders! Forum | Option Traders HQ! HQ | Link To Us! Link | Rules For Quoting Our Content! Quote Us | About Us! About Us | Contact Us! Contact

Back To Main | Back To Previous


(Please Enter A One Or Two Word Keyword)
Contract Neutral Hedging

Contract Neutral Hedging - Definition
An option trading hedging technique which covers a stock holding on a share by share basis with stock options.


Contract Neutral Hedging - Introduction
Unlike Delta Neutral Hedging, Contract Neutral Hedging is a static hedging technique suitable for amateur investors hedging long term stock positions and are willing to pay a slight premium for doing so. Contract Neutral Hedging is simply buying 1 put option or writing 1 call option for every 1 share held and is extremely suitable for amateur retail investors as Contract Neutral Hedging do not require complex calculations nor does it require a daily or even hourly rebalancing of the hedge like what is required in a Delta Neutral hedge. Protective Put and Married Put are Contract Neutral option trading strategies.



Assuming you own 200 XYZ shares at $50. $50 strike price Call Options and Put Options trading at $3.00 each.

To protect against a drop in value of the XYZ shares below $50, you decided to execute Contract Neutral Hedging by buying to open 2 contracts of XYZ's $50 strike price put options for a total price of $600. 2 contracts of put options represents 200 shares of the underlying stock, making a Contract Neutral Hedge.

Assuming XYZ shares drops to $40 upon expiration of the $50 put options

Loss on XYZ Shares : $10 x 200 = $2000

Gain on $50 Strike Put Options : ($10 x 200) - $600 = $1400

Loss on XYZ shares are totally hedged with $600 as the price of "insurance".

explosive option trading mentor Explosive Short-Term Options Trading
Find Out How My Students Make Over 87% Profit Monthly,
Confidently, Trading Options In The US Market!


Contract Neutral Hedging - Requirement
Contract Neutral Hedging can only be achieved through the use of stock options as it requires an instrument that will rise in value in step with a drop in the underlying stock while not losing money if the underlying stock rises. Stock options are the only financial instruments which offers such unlimited profit potential but a maximum loss limited to the price paid for it, which is only a small fraction of the price of the stock. This makes options trading very powerful.


Contract Neutral Hedging - How
Unlike Delta Neutral Hedging with all its complex delta calculations, Contract Neutral Hedging only requires buying or writing the same number of stock options as the number of shares held, bearing in mind that 1 contract of stock option represents 100 shares. So, if you own 300 shares, you would buy 3 contracts of put options in order to achieve Contract Neutral Hedging.



Contract Neutral Hedging - Popular Options Trading Strategies
Here are some popular options trading strategies utilizing the concept of Contract Neutral Hedging:

Protective Put - The buying of as many put options as the number of shares held in order to seal in existing profits.

Married Put - The buying of as many put options as the number of shares held right from the onset in order to hedge the position from going into a loss.

Covered Call - The selling of as many call options as the number of shares held in order to decrease downside loss and increase upside profits.

Covered Call Collar - The buying of put options in addition to a Covered Call in order to eliminate downside loss while still increasing upside profit.


Contract Neutral Hedging - Relation To Synthetic Positions
Whenever a Contract Neutral Hedging position is established, a corresponding synthetic position also becomes created. A complete understanding of synthetic positions is necessary to prevent unknowing creating unfavorable positions.





Continue your journey of discovery...
Click Me For Content Index
Click Above For Content Index

Got Question / Suggestion?
What Is Hedge Ratio?
What Is Delta Neutral Hedging?
What Is Gamma Neutral Hedging?
What Is Delta?
What Is Hedging?
What Are Protective Puts?
What Are Married Puts?
What Are Option Trading Strategies?
What Are Synthetic Positions?
What Is Conversion/Reversal?

Back To Main | Go To Option Trader's HQ

 

Please Click On Keyword...





Important Disclaimer: Options involve risk and are not suitable for all investors. Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither optiontradingpedia.com, mastersoequity.com nor any of its data or content providers shall be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. Data is deemed accurate but is not warranted or guaranteed. optiontradinpedia.com and mastersoequity.com are not a registered broker-dealer and does not endorse or recommend the services of any brokerage company. The brokerage company you select is solely responsible for its services to you. By accessing, viewing, or using this site in any way, you agree to be bound by the above conditions and disclaimers found on this site.

Copyright Warning: All contents and information presented here in optiontradingpedia.com are property of Optiontradingpedia.com and are not to be copied, redistributed or downloaded in any ways unless in accordance with our quoting policy. We have a comprehensive system to detect plagiarism and will take legal action against any individuals, websites or companies involved. We Take Our Copyright VERY Seriously!