Best hedge against market drop

[Turveyd]

A hedge has a risk implication, okay your thinking if market does well your business can swallow the loss from the hedge.

If the market starts going down, then join that by shorting and make some money to support your business.

But if the market is going up, why not join that and make so extra money for later wgen you need it.

 

[ScroogeMcDuck]

If you're willing to take interest rate risk instead of market risk, you could buy EDV. It has a beta of negative 0.6. It goes up whenever SPX goes down because of flight to quality. This is an essentially free way to hedge against SPX decline, as long as interest rates stay low.

 

[OptionGuru]

Another option is "self hedging/insurance" - in other words no hedging. Pay the premiums to yourself.

 

[rolando87]

Sounds like you should buy a put option. It will be expensive but you can buy a 1 year put option on SPY. Each option is for 100 shares, thus you would need to purchase about 5 options to get the coverage you needed. Shitty thing about this hedge is that you swallow the loss immediately upon purchasing the option.

The other thing you can do as others have mentioned is sell 1 ES with expiry 1 year out from now. That potentially is a breakeven lose nothing hedge if the market is at the same place 9 months from now. However it is a more complicated hedge requiring like 5-10k margin at all times + more to cover the loss if it keeps going up.

You can also do more complicated option trades where your insurance cost is lower but your upside is limited if you buy a put but also sell a call at the same time but i'll leave that for the options guys to explain.

 

[OptionGuru]

Sounds like you should buy a put option. It will be expensive but you can buy a 1 year put option on SPY. Each option is for 100 shares, thus you would need to purchase about 5 options to get the coverage you needed.

I was going to post a similar idea, until I checked the Jan 20, 2017 SPY option chain - TOO EXPENSIVE.
So I posted the "self hedging/insurance" post instead.

Shitty thing about this hedge is that you swallow the loss immediately upon purchasing the option.

You can sell at anytime.

 

[rmorse]

I want to hedge against a drop in the S&P from today vs. about 9 months from now. For every 1% drop from today, I want $1000 protection. So in approx. 9 months if the S&P is down 50% from today I need $50,000 coverage, if its down 10% from today i want $10,000 coverage, etc. What would give me the best protection for the least cost?

Can you tell us what the business is?

 

[JackRab]

Dec'16 205 mini ES puts are about USD 11 (underl contr size 100)
Buy 5 puts for 6k insurance cost. Each 10 points drop in S&P is USD 500 profit (ex premium, which you consider a cost). So 200 points drop is 10k. for a net profit of 4k. 1000 points (-50%) is 44k net profit.

Or buy shorter term, but you'll have to rollover.

 

[magicz]

use a strangle for a black swan event...other than that it cost way too much to hedge unless you keep rolling out your hedge so not to lose too much premium

 

[murray t turtle]

I'm not "expecting" a drop, its for insurance purposes. I dont expect my house to catch on fire or to get in a car accident...

%%
Among the best, Levi;
dont have any long stock positions,[except maybe long term like in Roth.....] in May-Sept,
even more so when a bull-market is this OLD,+ OLD+ extended . Auto accidents happen much more @ certain times, for example when a teen-youngster is involved, alcohol involved, speed is involved- the market is risky now like that.................................................................

 

[Handle123]

My question is how much will business go up comparing it to same amount going down?
Then ask yourself what company that is like yours and what does the charting show for loss when overall Indexes have gone down?

Personally, I would not be selling futures on the Indexes or buying Puts on Indexes. I would short another stock, hedged, that is similar to yours or buy Puts in that other business. If you are doing well now, when market does down, you might not have same losses of overall market and be wasting money on those options for time market is waiting to go down, and if the market goes down. Plus, you need to know, when you would feel lose on what percentage of overall market going down. In past 9 months the Indexes have had a few down moves, how much has the business gone down during those times, so if you have not experienced losses, then you could buy deep OTM Puts several months out at cheap prices on SPX or cheaper Index, much has to be studied as far as losses felt in past nine months.