I was looking for true hedging strategies that stay inside the asset and now invite more mess by going into other ones. Do you have a hedging strategy that is confined to one asset?
Hedging strategies, which ones do you recommend?
- Thread starter Fred_Jns
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If you mean options, then no, I don't. I only trade rate and index futures, so any hedging is gonna be via either calendar or intermarket spreads, or with the deliverable. The calendars don't really interest me, and I would get no margin credit for any hedging performed with the underlying under my current brokerage arrangement.
When you sell notes against a long bond position, you're just confining your exposure to an interest rate differential in lieu of taking outright rate risk. Since rates across the curve are all related, the notes exposure just offsets some of the longer dated yield exposure.
(notes move less for any given shift in rates and so the net exposure is reduced)
Technically, this is an intermarket, or "cross" hedge, but at the same time it's highly liquid and very inexpensive to margin (CME likes to say "capital efficient").
For indices, an example is trading a higher beta portfolio against a lower beta one. You do this by spreading index futures long/short, e.g. buying NQ and selling ES if bullish. There's much more you can do with index spreads, like build a synthetic index that tracks a group of sectors, or build one that's less volatile than any of the outrights.
Now, with the introduction of micros, this is no longer the only option for futures traders looking to trade with smaller risks than the available liquid outrights can provide (calendar spreads notwithstanding), but it can also be a very profitable way to trade, and just because the spread is less volatile, that doesn't mean you can't make as much money with it. The exchanges let you lever it up by providing risk based margin for the spreads (SPAN margin).
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Pairs trading? But why you want to hedge anyway, hedging risks means you'll hedge away most of the upside potential too. There are so many strategies out there that will perform better than a hedging strategy.
You may purely spread trading or hedge when it is necessary. Even though you trade outright, there are times when you have to open opposite direction position in far month contract to prevent gap on next trading day.
Somehow, I feel your statement is very rude like you know everything and questioning something that you don't understand.
That's strange LOL, you get to share your opinion and I get to share mine.
What you say may be true to your scenario, but what I said is also true to many other scenarios too.
However, you definitely sound like you know everything when you don't pal.
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Never saw the point of using a hedge being a nimble equity & futures trader trader. To each their own, whatever works for you.
"I don’t really like hedging. To me, if something needs to be hedged, you shouldn’t have a position in it." Stanley Drunkenmiller
"Hedges can be expensive and good trades don’t need them, a good exit plan is the best hedge." Stanley Drunkenmiller
"I don’t really like hedging. To me, if something needs to be hedged, you shouldn’t have a position in it." Stanley Drunkenmiller
"Hedges can be expensive and good trades don’t need them, a good exit plan is the best hedge." Stanley Drunkenmiller
Spot on.