I am looking at hedging strategies for my spread bets. I currently have a short on the FTSE250, the index I am most highly correlated to, but I also wanted to look at buying an option. I checked on IG Index’s site this morning to get prices for buying a PUT option on the FTSE100 (they don’t seem to offer options on the FTSE250 but I wanted to work out what it would cost roughly anyway).

So I checked three contracts, April, June and September. Please could someone let me know if my calculations are correct? It seems pretty expensive but maybe I am not calculating these correctly.

So I presumed a strike price of 6400, around where the FTSE100 is now.

I want to hedge half of my money at risk, so £22,500. I always start of with 7% stop loss levels on my bets so I thought a 7% drop on the FTSE100 would be a good way to calculate the amount I need. That makes the level I am looking for at 5952 (i.e. 7% of 6400). That is 448 points away from 6400 and if I am hedging £22,500, it works out to £50 a point.

The prices for a PUT buy for each contract are as follows; Apr – 92.2; Jun – 189.7; Sep – 290.3

Using those figures at £50 a point I calculate that the options would cost me; Apr - £4,610; Jun - £9,485; Sep - £14,515. Therefore my breakeven level for each would be; Apr – 6307.8 (1.44%); Jun – 6210.3 (2.96%); Sep – 6109.7 (4.54%)

Is that correct?

If I were to go for one, I would probably buy the June contract which would cost me £9,485 and the FTSE100 would have to drop by 2.96% for me to break even.

Seems expensive but when I look at my current hedge of shorting the FTSE250, I am down almost £6,000 and it has risen by 1.8%, so maybe not that expensive?

Any help, recommendations are very welcome.

Thanks