Baron (Jun 26, 2003 4:36:44 PM)
Ok, today we're pleased to welcome Gene Weissmam of E-Brokerage, LLC to the Elite Trader Chat Room.
Gene Weissman (Jun 26, 2003 4:37:01 PM)
Thanks Baron and fellow traders..Good afternoon..I'm Gene Weissman of E-Brokerage, LLC and I would like to share some hedging strategies that stock hedge funds use. I will give examples and then I could answer some questions. Our example is a $20,000,000 Long Stock Hedge Fund, that can use margin(customer) and can hedge with Options, ETf's and Futures.
Gene Weissman (Jun 26, 2003 4:37:32 PM)
A Long Strategy Stock Hedge Fund is normally invested in stocks, however
the fund may hedge by using a short position in Option Contracts, Futures or Exchanged traded funds, to protect against a market downturn.
Assume a hedge fund has $20,000,000 in long positions . The funds portfolio
has a Beta(Volatility of the Portfolio to the S& P 500) of 1. This means that the
stock portfolio will move the same amount(up or down), with the S & P 500.
Gene Weissman (Jun 26, 2003 4:38:06 PM)
The Fund manager is bullish long term but believes the S & P 500 could fall 10 %,
within the next three months, and he decides to protect(go short) 25% of his portfolio
so he will protect his gains and not have all long market exposure. The fund manager
could short selective stocks he feels are overvalued, but his short positions may not necessarily go down , if the market falls 10% in value, so the fund manager decides to
go Short S & P 500 futures, since the Beta of his stock portfolio is the same as the
S & P 500 index. Assume there is 28 days to July option expiration and S & P 500
Sep. Future settles at 991.50 (Friday June 20, 2003 close).
Gene Weissman (Jun 26, 2003 4:38:51 PM)
Is everyone with me so far?
Baron (Jun 26, 2003 4:39:20 PM)
We're with you.
patefern (Jun 26, 2003 4:39:24 PM)
yes, delta neutral
Gene Weissman (Jun 26, 2003 4:39:28 PM)
cool
Gene Weissman (Jun 26, 2003 4:40:18 PM)
Contract Value(Sept. Settle)- 991.50 Contract Size - $250.00 X Index (Pit Traded )
Gene Weissman (Jun 26, 2003 4:40:37 PM)
991.50 X $250 = $247,875.00 (Market Value per contract S & P 500 Futures )
Gene Weissman (Jun 26, 2003 4:40:58 PM)
Formula to Hedge 25% of Stock Portfolio= PV/CV X Beta of Portfolio(1.0) X .25
Gene Weissman (Jun 26, 2003 4:41:13 PM)
Portfolio Value/Contract Value= # Futures to Hedge X 25%= Hedge Ratio(# of Futures to hedge 25% of the portfolio)
Gene Weissman (Jun 26, 2003 4:41:50 PM)
therefore $20,000,000 / $247,875 = 80.686( 80 futures) X .25 = 20 Futures
Gene Weissman (Jun 26, 2003 4:41:55 PM)
Short -20 S & P 500 Futures, would hedge 25% of this stock portfolio.
Gene Weissman (Jun 26, 2003 4:42:21 PM)
Before we hedge with Options and ETF's any questions?
Gene Weissman (Jun 26, 2003 4:43:03 PM)
Remember , use the formula to figure out the proper hedge...Formula to Hedge 25% of Stock Portfolio= PV/CV X Beta of Portfolio(1.0) X .25
Catalite (Jun 26, 2003 4:43:09 PM)
The beta of the portfolio would be calculated over what time frame?
luojun (Jun 26, 2003 4:43:57 PM)
I think the best is to use the expected beta? :)
Gene Weissman (Jun 26, 2003 4:44:00 PM)
I would use the beta quaterly..until the future is rolled
Baron (Jun 26, 2003 4:44:36 PM)
Any other questions before we move on...
Gene Weissman (Jun 26, 2003 4:44:53 PM)
The poertfolio in this example is matched with the s & P 500 future, so we will assume the beta will be constant
Gene Weissman (Jun 26, 2003 4:45:32 PM)
The $20,000,000 portfolio might be made up of 20 to 40 stocks
Gene Weissman (Jun 26, 2003 4:45:45 PM)
Short -20 S & P 500 Futures, would hedge 25% of this stock portfolio.
Gene Weissman (Jun 26, 2003 4:45:58 PM)
What if I wanted to hedge with E-Mini’s instead of the big contract?
Gene Weissman (Jun 26, 2003 4:46:17 PM)
The Contract Value of the E-Minis is $50 times the index( 1/5 of the big contract),
therefore -100 E-Mini’s(5 X 20 ) would give me the same portfolio protection.
Gene Weissman (Jun 26, 2003 4:46:55 PM)
So -100 E mini's S & P 500 = -20 big contract
Gene Weissman (Jun 26, 2003 4:47:09 PM)
How many Spiders-SPY(S & P 500 ETF’s) would I need to hedge the same portfolio?
Gene Weissman (Jun 26, 2003 4:47:47 PM)
any one know? 2500 SPY's = 1 S & P FUTURE
Gene Weissman (Jun 26, 2003 4:48:27 PM)
Since all these securities follow the S & P 500 index, the contract value is important
when figuring out the correct number of ETF’s to Hedge. The contract size in Spiders is 1/10 of the S & P 500 index, therefore 2500 SPY = 1 S & P 500 Future
Gene Weissman (Jun 26, 2003 4:48:46 PM)
-50,000 SPY (2500 X 20 )would hedge 25% of a $20,000,000 Portfolio
Gene Weissman (Jun 26, 2003 4:49:07 PM)
Equivalent positions -50,000 SPY ETF’s = -20 S & P 500 Futures = -100 E-mini’s
Gene Weissman (Jun 26, 2003 4:49:31 PM)
Before I go into hedging with Options..any questions?
Gene Weissman (Jun 26, 2003 4:50:29 PM)
Ok I will move on to hedging with options
Baron (Jun 26, 2003 4:50:40 PM)
Looks like we're good so far Gene.
Gene Weissman (Jun 26, 2003 4:50:44 PM)
Hedging a 25% of a $20,000,000 Portfolio with S & P 500 index Options
Gene Weissman (Jun 26, 2003 4:50:59 PM)
Since Options will not move point for point with the future, we will have
to figure out the Delta(the price change of the option compared to the
underlying Future), using an option pricing model . We want to purchase put
Options to Equal a sale of 200 S & P 500 futures .
Gene Weissman (Jun 26, 2003 4:51:20 PM)
The Portfolio Manager selects the (2003 Jul 1010.00 Puts) , since these puts
were undervalued at the time of purchase and the options Delta of .61 will
give the Fund manager protection like a futures contract, but the most the
fund manger can lose on the upside is the put option premium. The options
are not marginable and must be paid for in full.
Gene Weissman (Jun 26, 2003 4:51:41 PM)
S & P 500 Index-
See Option Calculator at http://www.cboe.com/TradTool/OptionCalculator.asp
Gene Weissman (Jun 26, 2003 4:51:54 PM)
Assumptions- 28 days until July expiration Future(Sept.)- 991.5
Volatilty 20% Annual Interest 4% Dividend Yield 2% Strike Price- Jul. 1010 Put
Gene Weissman (Jun 26, 2003 4:52:12 PM)
Put Theoretical Valuation 31.5 Offered at 30.5 on CBOE floor ,
One Put would cost $3050.00 , per contract. 820 contracts, would
Equal –200 S & P 500 fuures (82,000 X .61(Delta of Jul. 1010 Puts )= -50,000
Gene Weissman (Jun 26, 2003 4:52:40 PM)
820 Jul. 1010 Puts Delta at .61= -50,000 SPY shares = –200 Futures S & P 500
Gene Weissman (Jun 26, 2003 4:52:58 PM)
More complex options positions can be used that include a hedge wrap
Or “Collar”. The fund manger buys puts and funds the put purchase by the sale of calls. The fund manger could also sell index calls against his portfolio ,
for additional income and “roll” the postions each month . Option hedging
strategies must be adjusted for market conditions and no one option strategy
is suitable for all situations.
Gene Weissman (Jun 26, 2003 4:53:16 PM)
What hedge strategy does the portfolio manager select?
Gene Weissman (Jun 26, 2003 4:53:52 PM)
This is a complex questions. Some fund managers may be prohibited from
using options or futures(fund charter). Others could short stocks , so short SPY
would be a good hedge. Usually the short strategy the fund manager selects
has to do with cost effectiveness, pricing , margin of position, fund charter , how long the manger will stay in the position etc. These examples are hedges that
are used by some of our professional customers at E-Brokerage, LLC . We
do not recommend using any of these hedging strategies or recommended
the use of derivatives as portfolio insurance for public customers. Please
contact qualified investment advisor if you wish to use portfolio insurance.
Gene Weissman (Jun 26, 2003 4:54:49 PM)
I know this is a complex topic and something that cannot be learned in 30 minutes..any questions about hedging in general?
Zuizo (Jun 26, 2003 4:55:14 PM)
Gene... My portfolio is 200% invested in stocks (150K + 150K margin) I have 30% total *unrealized* profit . I specialize in mid and small cap stocks. I have 1 fear... a TERRORIST attack (dirty bomb) that occurs during non-market hours.
I'm looking for *disaster insurance* in options. The CHEAPEST way possible each month. Should I buy *way out of the money puts* on Naz 100? My goal is to minimize my downside under such an extreme scenerio. So Portfolio value = $360,000... but 150k is margin... how much money should I allocate to puts each month?
Gene Weissman (Jun 26, 2003 4:56:55 PM)
It's really hard to answer individual questions on hedging...I would stay short SPY's during market downturns and then adjust your positions at the end of the day
Gene Weissman (Jun 26, 2003 4:57:35 PM)
Use the formula...PV/CV= # of Futures to hedge and then keep a percentage of the portfolio hedged you are comfortable with
brianc (Jun 26, 2003 4:57:28 PM)
On hedging with options what do you recomend in order to keep the position correct in relation to market moves and how often would you adjust it
Gene Weissman (Jun 26, 2003 4:59:06 PM)
If the S & P moves up or down your Delta in the Options will change and may have to be adjusted. For most traders, I would kerep a short hedge on with E-Mini's or S & P's. Options can be too complex for most traders to keep adjusting
brianc (Jun 26, 2003 4:59:25 PM)
How often would you 'adjust' an options based hedge
Gene Weissman (Jun 26, 2003 5:00:28 PM)
It depends...if the market makes a big move down..my 820 puts will pick up "Delta's" and I could sell some puts and keep the hedge on
Gene Weissman (Jun 26, 2003 5:01:14 PM)
Normally a hedge fund may adjust a short position when market conditions change or roll the future to the next month
Gene Weissman (Jun 26, 2003 5:02:14 PM)
Option hedging and adjusting is quite complex and you need specilized software like micro Hedge to ADJUST PROPERLY
patefern (Jun 26, 2003 5:02:40 PM)
hedge fund manager has 25% hedged, where or what would be typical for the remaining 75%
Gene Weissman (Jun 26, 2003 5:03:58 PM)
Long stocks or ETF's...remember this is a long stock hedge fund and his 75% long match's the BEta of the S & P 500 , so say he has positions in 30 stocks
Gene Weissman (Jun 26, 2003 5:04:43 PM)
If the market drops say 10 or 15% and the fund manger is bullish..he may remove his hedge and then go long 100%
Gene Weissman (Jun 26, 2003 5:05:00 PM)
Anyone else?
patefern (Jun 26, 2003 5:05:16 PM)
but 25% hedged?
Gene Weissman (Jun 26, 2003 5:05:54 PM)
The 25% was $5,000,000 or 25% of a $20,000,000 dollar portfolio..
Gene Weissman (Jun 26, 2003 5:06:19 PM)
This Fund is always Long but wants some shorts
Catalite (Jun 26, 2003 5:06:15 PM)
Have you ever put on a 100% hedge?
Gene Weissman (Jun 26, 2003 5:06:52 PM)
If I was 100% Hedged on the correct ratio..this would be a program trade or the creation of a T-Bill synthically
Gene Weissman (Jun 26, 2003 5:07:50 PM)
The example I gave was a real one..a small specialist unit on the NYSE with $20,000,000 in overnight positions
Gene Weissman (Jun 26, 2003 5:08:20 PM)
The Short 20 futures was sometimes adjusted or "scalped " during the day
Baron (Jun 26, 2003 5:09:02 PM)
Gene, are there any recent trends in hedging? In other words, do you ever see fund managers gravitating toward any particular type of hedge?
Gene Weissman (Jun 26, 2003 5:09:34 PM)
I think E-Mini's and SPY's especially are being used more & more
Baron (Jun 26, 2003 5:10:07 PM)
why is that
Gene Weissman (Jun 26, 2003 5:10:32 PM)
The electronic access gives the manager the ability to put on or take off the hedge anytime and get a real P & L
Baron (Jun 26, 2003 5:11:03 PM)
Last call for questions....
Baron (Jun 26, 2003 5:12:02 PM)
Gene... thanks so much for joining us today.
Gene Weissman (Jun 26, 2003 5:12:10 PM)
I can be contacted at info@ebrk.com for any
questions..Thanks Baron & Traders
Baron (Jun 26, 2003 5:12:13 PM)
You can find more information on E-Brokerage at: http://www.ebrk.com/
| 
