Best way to hedge

Discussion in 'Trading' started by Chuck Krug, Aug 21, 2011.

  1. best way to hedge a portfolio of 60 short stocks?
    buy calls
    buy futures
    buy etf (spy,etc)
    have i overlooked anything?
  2. rmorse

    rmorse ET Sponsor

    You'll never know the "best" way until after the passage of time. You have to decide what risk YOU want to hedge out. So if you believe these stocks will under perform the "market", than buy the same $ amount of SPY. If you believe these stocks will under perform their sector, buy the correct $ amount of an ETF in each sector.

    You can also under hedge. It never makes sense to over hedge.
  3. run the stocks thru an analyzer and see what the weighted beta is and calc the number of ES cars you need to hedge. use the NQ if they're tech stocks. or just bought calls 2-3% OTM. the expiry depends on how long you want to hedge obviously.
  4. thanks for your time guys

    forgot to add that the beta is -1.32
  5. options are not my speciality (as some of you might know ;-)
    but was leaning towards buying calls as they tie up less capital than the etf's.
  6. mr. morse: the reason for my hedge is to temporarily protect against market upswings
  7. rmorse

    rmorse ET Sponsor

    Then is my opinion, I would BUY SPY the $ amount that your short at most, with no adjustment for Beta. We are in a market with a very high correlation from sector to sector. If you beta adjust, in this market, you might end up being longer than you want, when your targeting the short side of the market.
  8. of course if my short position runs against me, my dollar exposure goes up
    but i can adjust if needed
    was thinking about ES calls as they seem to offer the best value per capital used
    at first glance
  9. rmorse

    rmorse ET Sponsor

    If it's a short term strategy, that might work. However, premiums are very high right now, I'm not sure buying deltas that way won't be expensive insurance. If you buy the ES or SPY, no decay. I always feel keeping the hedge simple is best.
  10. To "hedge" something means to effectively eliminate any further profits or gain while the hedge is in place.

    So the first question is, what are you hoping to accomplish by hedging?

    If the answer is short-term gains versus long-term gains taxed basis, you need to compare the trade costs for hedging versus expected tax difference.

    If the answer is protect unrealized gains from loss, the degree to which you are hedged is parallel to potential further gains. If you are 50% hedged, your position can profit at 1/2 rate what it did when unhedged.

    If you are 100% hedged, no different than closing a position outright because no further meaningful gain is possible. Pretty much the same as net-flat other than tax basis on the position

    So the question of how to hedge cannot be properly answered until one knows what exactly you are trying to acheive by hedging
    #10     Aug 21, 2011