Hedging Nonquarterly SX5E Options with Futures, Rolls, or Swaps

Summary

The document asks how to hedge an SX5E option expiring in a month when SX5E futures are listed only at quarterly expiries. The response describes using an underlying exposure for delta hedging, analogous to hedging an equity option with its stock. It also notes that the hedge may need to be unwound around expiry, when gamma-driven trading can intensify.

For options whose expiry extends beyond the available futures contract, the response suggests rolling futures positions periodically or converting some delta exposure into longer-dated swaps. It gives no details on contract specifications, hedge ratios, liquidity, basis risk, or the execution of rolls and swaps, so these are high-level approaches rather than a complete hedge procedure.

Key ideas

• An option can be delta-hedged with exposure to its underlying market.
• Quarterly futures expiries may require rolling positions to maintain a longer-dated hedge.
• Longer-dated swaps can provide an alternative source of hedge exposure.
• The response flags expiry-related gamma activity but gives no quantitative hedge parameters.

Tags

# SX5E option hedge


# SX5E option hedge












There are only quarterly contracts (3,6,9,12) for SX5E futures. In practice, how do we hedge SX5E option at expiry for non-quarterly contracts (say April)?

## Answer by JoshK (score 3, accepted)

https://quant.stackexchange.com/a/63390

This is just like any other option. For example, if you are trading an IBM option, you hedge with IBM stock, which doesn't expire at all, (obviously).

You then sell your hedge in the gamma-storm that enuses at expiry.

For longer term options where you have an expiry that goes way past the futures you have two choices:

- Trade the rolls periodically and/or

- Exchange some of your delta into longer term swaps

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.