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

[nazzdack]

1) Being excessively concerned about "hedging" can mean that you are undercapitalized, scared of volatility and/or trading a position-size that is larger than your comfort level.
2) You may be better off just to offset an open-position instead of trying to "hedge" it selectively in the belief that you can outguess the market.
3) You can consider trading options, SSF's, unleveraged ETF's, leveraged ETF's, inverse ETF's, index futures et al that correlate precisely to your underlying position.
4) You have to be ready for scenarios when the relationship between the instruments don't behave exactly as you expect them too.
5) Avoid "Google/Yahoo"-type trades that can correlate some of the time but not all of the time. They should be thought of as separate outrights, not a spread nor arbitrage.

 

[c4ytan]

winston, depending on how strong my conviction is of the position I'm taking, I already trade TNA/TZA or IWM and TWM. Given that TNA and TZA are 3x leverage, I'm trying to get ideas on how to hedge my bets since the volatility is gut-wrenching!

 

[c4ytan]

Quote from nazzdack:

1) Being excessively concerned about "hedging" can mean that you are undercapitalized, scared of volatility and/or trading a position-size that is larger than your comfort level.
2) You may be better off just to offset an open-position instead of trying to "hedge" it selectively in the belief that you can outguess the market.
3) You can consider trading options, SSF's, unleveraged ETF's, leveraged ETF's, inverse ETF's, index futures et al that correlate precisely to your underlying position.
4) You have to be ready for scenarios when the relationship between the instruments don't behave exactly as you expect them too.
5) Avoid "Google/Yahoo"-type trades that can correlate some of the time but not all of the time. They should be thought of as separate outrights, not a spread nor arbitrage.

nazzdack,

#1) you're absolutely right. The volatility is what I'm concerned about that's why I'm thinking of hedging strategies. I don't think I'm undercapitalized, I think I'm just greedy.

#2)
What do you mean by "offset an open position"?

#3)
This is exactly what I'm asking for... if I'm long IWM or TNA, what would be my "other position" be?

#4) Yes of course. No strategy is perfect.

#5) I actually never trade individual stocks.

 

[WinstonTJ]

Guys are trading now - after the close i'll ask one of the portfolio managers what they would do to hedge the R2k.

A few related questions:

Are you looking for short-term overnight risk?
are you looking for a hedge as a % of your overall long R2k position?
roughly - how much are we talking? Full futures contracts, minis?


Most importantly, what size is your long R2k position and how much (in %) do you want to be hedged?

 

[nazzdack]

Quote from c4ytan:

#2)
What do you mean by "offset an open position"?

That's a "fancy" way of saying to sell an existing long-position or buy-back a short-position.

#3)
This is exactly what I'm asking for... if I'm long IWM or TNA, what would be my "other position" be?

You have to figure that out for yourself among the universe of products available to trade.

 

[caementarius]

I think if you want less exposure to volatility, you just need to size down. I'm having trouble making sense of what you want to do exactly.

 

[WinstonTJ]

c4ytan - I asked the PM of TNA/TZA how he would hedge against the R2k and the answer was buy TZA. When I said what about the volitility he suggested rebalancing your portfolio/hedge on a daily basis.

Futures would be better - but require LOTS more $$$ and still need rebalancing often.

 

[c4ytan]

winston, thanks for the help! I think I have a better idea now of what I need to do.

 

[c4ytan]

Btw, I just wanted to say that Direxion rocks for introducing TNA and TZA. I hope a 4x and 5x comes out later on.

 

[WinstonTJ]

Quote from c4ytan:

Btw, I just wanted to say that Direxion rocks for introducing TNA and TZA. I hope a 4x and 5x comes out later on.

Since 80% is required to be invested in the basket of stocks (bull funds) that leaves 20% to get 220% exposure (11:1) which isn't cheap... I doubt the SEC would allow it #1 and #2 you would have crazy management fees because at 4x your 20% cash would need 320% exposure... 16:1 leverage isn't cheap, stick with futures at that point.

Also, if you want leverage, short TZA and use the proceeds to buy TNA