How to hedge SPY?

kmiklas

kmiklas

I got smacked the other day: long on a basket of about 20 equities from different sectors in the SnP, thinking that sector diversity would protect me from any big moves... but they all got away from me together! Grr...

How would you hedge downside risk for SPY? A couple ideas I have: (all price-normalized):

- Set up pairs for each of the sectors, like T and VZ. Long one, short the other. Pretty much a classic pair trade, but I'm using it as a hedging device.
- Long SPY, short DOW, QQQ and/or some other ETF.
- Hedge a specific equity in SPY (GS) against its sector ETF (XLF)

Any way to hedge against downside risk in the SnP going long? I'd kinda like to avoid the fees if possible.

Thx in advance for the responses. Keith XD :)
 
Find beta of the equities to sp500 index and hedge with index put / vix call. Gold and long term bond are hedges too although arguably not optimal at the moment.
Hedging every single trade can be expensive.
 
The problem with using VIX is you die by a thousand cuts...positive skew. So you lose lose lose in the hopes of getting a big move in your favor. Just look at a chart of VXX.
I think I would look at selling calls and using the proceeds to buy puts. Or just buy puts.

There really is no such thing as true diversification in equities.
In fact, when the proverbial stuff hits the fan everything goes down.
 
Arnie said:
The problem with using VIX is you die by a thousand cuts...positive skew. So you lose lose lose in the hopes of getting a big move in your favor. Just look at a chart of VXX.
I think I would look at selling calls and using the proceeds to buy puts. Or just buy puts.

There really is no such thing as true diversification in equities.
In fact, when the proverbial stuff hits the fan everything goes down.
More...
Premiums get pricey...
 
kmiklas said:
I got smacked the other day: long on a basket of about 20 equities from different sectors in the SnP, thinking that sector diversity would protect me from any big moves... but they all got away from me together! Grr...

How would you hedge downside risk for SPY? A couple ideas I have: (all price-normalized):

- Set up pairs for each of the sectors, like T and VZ. Long one, short the other. Pretty much a classic pair trade, but I'm using it as a hedging device.
- Long SPY, short DOW, QQQ and/or some other ETF.
- Hedge a specific equity in SPY (GS) against its sector ETF (XLF)

Any way to hedge against downside risk in the SnP going long? I'd kinda like to avoid the fees if possible.

Thx in advance for the responses. Keith XD :)
More...

Just ran a simple test that buys both VXX and SPY at the open and closes at the close.
1 SPY to 0.15 VXX seems to be optimal ratio for that period. Not too bad for hedging considering simplicity.

upload_2021-7-13_10-56-6.png

upload_2021-7-13_10-57-11.png


PS. VIX on the pictures = VXX
 
1. Calculate your portfolio beta
2. Sell SPY in that ratio for every dollar you have in your long only portfolio

E.g. if your portfolio beta is 1.25, and you have $100k invested in your portfolio, then you would sell $125k worth of SPY.

You are now beta hedged.
 
kmiklas said:
Thank you!!! What tool did you use for this comparison?
More...

It's RealTest. Here is my script
Code: 
TestSettings:
    AccountSize: 100000
    StartDate: 1/1/10
    EndDate: 1/1/22
    TestName: SPY_HEDGE

Template: defs
    Allocation: S.StartEquity
    Commission: 0
    Slippage: 0

Strategy: SPY
    Using: defs
    Quantity:  (S.Alloc * 0.1) / FillPrice
  
    Side: Long
    EntrySetup: Symbol == $SPY

    ExitRule: 1
    EntryTime: AtOpen
    ExitTime: AtClose

Strategy: VIX
    Using: defs
    //Commission: Max(0.005 * Shares, 1) // IB
    Quantity:  (S.Alloc * 0.015) / FillPrice
  
    Side: Long
    EntrySetup: (Symbol == $VXX or Symbol == $VXX_201901)

    ExitRule: 1
    EntryTime: AtOpen
    ExitTime: AtClose

@Arnie
As for commissions I didn't include any or slippage. Both are feasible assumptions these days as those are highly liquid instruments.
 
You must log in or register to reply here.
Back
Top