If I have 10000 shares of TQQQ, I want to hedge it with the NQ futures, how to calculate the number of contracts that I need? Are there any other instruments that I can use to hedge it?
10,000 sh x $66 = $660,000... x3 leverage = ~ $2,000,000 equivalent risk play. 1 NQ futures contract = 7445 x $20/pt = ~ $150,000. $2MM / $150K = ~ 13 contracts. Of course, hedging that way you've just about neutralized your play. Using options as suggested by R. Morse still leaves the upside potential and risk protection for the cost of the option premium.
Thank. Is the x3 in your calculation necessary? But I am not familiar with options. I also feel the liquidity of futures is much better.
Well yeah. Your $660K position will have the same $$ value change as $2MM in the NQ because of the TQQQ's "3x leverage". So you'd need $2MM worth of protection in the NQ to offset. Fully hedging with futures means you're "Long $2MM (equivalent) in the TQQQ", and "Short $2MM in the NQ". You can't make much money that way. I'm not an options expert either, so I'm sure somebody will pipe in and correct me if I get this wrong... but it looks like that if you wanted to use options, you'd pay $2-$3/share in option Put premium depending upon strike price and expiration date chosen. IOW... you could hedge your position for a cost of ~$20,000-$30,000 for a period of time... but that would leave the full upside potential (minus the $20-$30K option cost, of course, plus the amount of price risk you're taking.... the difference between current price and the option strike price.)
Yes, the 3x is necessary because for every dollar in TQQQ you control $3 worth of Nasdaq price-movement. NQ futures are $20/pt x 7,448 = $148,960 per contract.
Just a heads up, you do know about the deterioration in 3X efts right? If you don't, you need to learn about that very quickly.
As discussed ad nauseam in numerous posts, there is no "deterioration" in 3x or 2x or inverse funds. They return 300% or 200% or -100% of the daily returns of the index. That means that by simple mathematical fact a 3X fund will only return 3X the underlying index over a single day. Over multiple days it may return less or more, it is entirely mathematically dependent on the path of the underlying. If you re-balance your hedge daily to reflect the previous days return you will indeed have pretty much an exact hedge. You just need to understand what a daily returns index is or it's returns may not make sense.
That's what I was asking, do you understand that over time all 3 times ETFs end up at zero? I didn't mean on one day, but over time.