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

C

c4ytan

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.
 
Quote from c4ytan:
........what would be good?
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You could buy and/or short-sell an ETF that is simultaneously long AND short IWM and be perfectly "hedged"! :cool:
 
Quote from nazzdack:

You could buy and/or short-sell an ETF that is simultaneously long AND short IWM and be perfectly "hedged"! :cool:
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The "yield to broker" would be very good for this sort of trade :)
 
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?
 
Quote from c4ytan:

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.
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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.
 
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