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How to hedge?
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How to hedge?

  #1 (permalink)
Trading Apprentice
Brussels, Belgium
Trading Experience: Advanced
Platform: IB
Favorite Futures: ES, SPY, AAPL
Posts: 7 since Jan 2015
Thanks: 1 given, 3 received

How to hedge?

I want to hedge a 100K $ portfolio of US equities for the next 3 months.

If S&P500 drops 5% I want to make 5% with my hedge.

What is the best/cheapest way to do this? Who can give me some advice?

* Shorting SPY
* Shorting ES
* Buying puts

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  #2 (permalink)
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  #3 (permalink)
Elite Member
New York City + New York/USA
Trading Experience: Advanced
Platform: Sierra Chart
Favorite Futures: ES
Posts: 19 since May 2014
Thanks: 12 given, 11 received

I'd say shorting ES if you want a full hedge. I choose ES over SPY simply because you have the option to take off the hedge overnight for whatever reason.

If you want a theoretical "partial hedge", go for the options. You have to understand the greeks and how options change in pricing to have an idea of how they will move relative to the underlying. It would be tough to do a full hedge with options because of how the greeks change in pricing, I would imagine deep in the money puts would be the best for that. Ofcourse, you must be aware of the time premium you will be paying with options. There is also a small premium in ES that will decay as the contract gets closer to expiration.

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  #4 (permalink)
Elite Member
Buenos Aires Argentina
Trading Experience: Advanced
Platform: NT, MT4, Sierra
Favorite Futures: S&P, Bonds, Crude, FX
Posts: 250 since Sep 2014
Thanks: 37 given, 243 received

Shorting SPY will give you a 1:1.

Shorting ES at today's prices will give you a little bit more than 1:1 with the notional value at today's prices being about $106k.

Since you mentioned 3 months, you'll have to pay for one roll over on the futures, and for the ETF you have asset management fees that will act as a drag to your carrying costs in addition to any interest expense from your broker.

Buying a put gets bit more complicated, but assuming you buy an at the money put which will have roughly a 50 delta, meaning you'll get half the move covered if the market drops minus the theta time decay.

Since it seems like your understanding of the instruments is relatively basic, perhaps shorting or buying at the money puts on the SPY will be your best bet. If you had a better understanding of options, you might do something more advanced like buy at the money options and sell out of the money calls.

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