How can you hedge an ETF that holds a basket of stocks?

Hi, I'm fairly new to trading and wanted to get some advice on what would be good hedges for taking a position on an ETF like IWM (Russell 2000). If I am long IWM, what would be a good short and why? If I am short IWM, what would be a good long and why? Thanks.

 

If you are long 100 shares of the ETF; you could buy a put to hedge your position.

 

What movement in prices are you trying to capture?

 

You could buy and/or short-sell an ETF that is simultaneously long AND short IWM and be perfectly "hedged"!

 

The "yield to broker" would be very good for this sort of trade

 

"Financial professionals" have to make a living somehow.

 

Let me explain what I was trying to say...

Basically, if I am long Google and short Yahoo... I have a market neutral situation wherein if the whole market crashes, I can expect Google and Yahoo to both tank so even if I lost money on Google long, I would have made money on my Yahoo short.

Was just wondering what if you're holding a basket of stocks like the Russell 2000 index, how can you possibly hedge against that in the same manner as above?

I guess another way of looking at this is how do you hedge when your position is directly market-correlated?

 

There are a few things. First, Futures and Options, or there are inverse russell ETFs such as TZA (not sure if there is a 2x version). If you are long $100 of IWM you would only need to purchase $33 in TZA.

The other thing you could do is short some of the stocks in the R2k - look at TNA for example. 3x R2k ETF, we optimized the R2k from 2000 names down to 700 names. You could pick out some of those stocks and short them - but you will find that your finance and transaction fees will be higher than simply purchasing TZA outright.

Other have asked - what specific movement are you trying to hedge against?

 

Thanks for the insight. That's really helpful. That's what I was thiking actually.. that I probably need to short some stock when I'm long IWM.

Both positions actually... My strategy is market timing so I would go long and short the Russell 2000 at any point in time for several days.

 

c4ytan - if you would like to get serious technical clarification I could ask our market makers what they do to hedge TNA... Most often they short the basket of stocks but they also use futures and swaps - and other derrivitives.

What scale are you talking? if you have less than $1mm to hedge I personally think that you should look at TZA... not trying to market or sell this (i work for that company) but I truly do not know any other 1x or 2x R2k ETF available.