For delta-neutral hedging, you need to long the stock and short the call options on the underlying stock. Is it possible to use put options to construct a delta-neutral portfolio? For basis trade of CDS, the CFAI Book 6 (page 359) says that you should buy the underlying bond and short the CDS. This does not make sense to me, shouldn’t you buy the underlying bond and buy the CDS in order to arbitrage a negative basis trade? Pls Help!! Thanks!
http://www.investopedia.com/articles/trading/08/negative-basis-trades.asp http://www.optiontradingpedia.com/delta_neutral_trading.htm
Delta: yes you can hedge delta of lets say long call by long put but you will have higher gamma, vega and theta, but in general you can use anything that has opposite delta to the underlying position Basis trade: you are right, I agree
Thanks for the help guys. bpdulog - From the investopedia link, it appears to explain the following: “When you short a credit default swap, this means you have bought protection, much like an insurance premium. While this might seem counterintuitive, just remember that buying protection means you have the right to sell the bond at par value to the seller of protection in the event of default or another negative credit event. So, buying protection is equal to a short.” I am quite confused here, i thought when you long a CDS means you are buying protection? How is it possible that if you short a CDS, you are buying protection given that you are taking the position of the seller?
Long CDS: Buying protection against default therefore you are short underlying bond SHort CDS: Selling protection against default therefore you are long underlying bond
2010CFACFA Wrote: ------------------------------------------------------- > Thanks for the help guys. > > bpdulog - From the investopedia link, it appears > to explain the following: > > “When you short a credit default swap, this means > you have bought protection, much like an insurance > premium. While this might seem counterintuitive, > just remember that buying protection means you > have the right to sell the bond at par value to > the seller of protection in the event of default > or another negative credit event. So, buying > protection is equal to a short.” > > I am quite confused here, i thought when you long > a CDS means you are buying protection? How is it > possible that if you short a CDS, you are buying > protection given that you are taking the position > of the seller? Long CDS = protection buyer = short bond