How to hedge SPY?

[Handle123]

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

There's half dozen ways I use, so let's use most practical. Check last twenty years of daily and weekly bars at extremes, find/test several chart patterns that happens at extremes, this way you not keeping hedges on all the time and losing decay. Being market going up up up, you can go short S&P futures then hedge those with call options in case you didn't find The top.

You can also find stocks in lowest negative sectors and split funds in equal amounts so you are long and short.

My least concern are fees. Insurance not free.

 

[ValeryN]

5% return over 11 years? Am I reading that right because that sucks if I read that correctly..

Return is irrelevant in this case (I simply used a fraction of account in that test). Just ignore numbers on that axis. Hedging ability is represented by the Combined curve. For hedging, you would want the Combined to be as flat and as close to 0 as possible.

 

[murray t turtle]

Well that's the difference between a hedge and an exit. You hedge when you want to get a cleaner exposure on a trade. You exit when the risk/loss is too great.

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Exactly.
I NEVER exit\ like most likely many did yesterday 'cause GS, MS, Swiss banks forecast a good SPY/QQQ /UDOW .......uptrend/LOL
Another big difference; I 've proved IBD newspaper,books are so much better than NYT/its not even close. ......I dont do many small caps, but i may.
Something else helps, my banker dad , when i was kid LIMITED my screen time\especially TV..........................................................................................................,But my mom + banker dad liked me reading his library, NRA magazines.

 

[murray t turtle]

Return is irrelevant in this case (I simply used a fraction of account in that test). Just ignore numbers on that axis. Hedging ability is represented by the Combined curve. For hedging, you would want the Combined to be as flat and as close to 0 as possible.

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Handle 123 noted ''insurance not free.'' Exactly\but $600,000 of auto insurance\ for good safe, mature driver in our area=less than $200 per 6 months.
[2] BUT the car rental on that insurance is so super cheap/change/coins ; i like to insure that myself.MY favorite way to hedge SPY is with a combo of SPXL, some sds,QQQ/QLD......but that may tend to underperform or not profit much in MAR, SEPT.
[Buy SPY or SPLV first, later do SPXL]
QQQ has strangely underperformed SPY much of this year/but that's life=

 

[Girija]

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Handle 123 noted ''insurance not free.'' Exactly\but $600,000 of auto insurance\ for good safe, mature driver in our area=less than $200 per 6 months.
[2] BUT the car rental on that insurance is so super cheap/change/coins ; i like to insure that myself.MY favorite way to hedge SPY is with a combo of SPXL, some sds,QQQ/QLD......but that may tend to underperform or not profit much in MAR, SEPT.
[Buy SPY or SPLV first, later do SPXL]
QQQ has strangely underperformed SPY much of this year/but that's life=

Hedge SPY with SPXL? That moves in the direction of spy with more pace.

 

[murray t turtle]

Hedge SPY with SPXL? That moves in the direction of spy with more pace.

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Exactly Girija;
+ that'$ why i noted in my last post ''buy SPY or SPLV first, wait + buy spxl''
BUT spxl can have huge drawdowns\ eVen a bullmarket. SPXL has a smaller dividend than SPY or splv. SCHW always gives me a CLEAR warning on risk of 3x ETFs; but the multi hundred page annual report has some good risks we never thought of, if you love to read + i do.=

 

[KCalhoun]

SPXS, today I like TZA best if it takes out new highs

 

[murray t turtle]

SPXS, today I like TZA best if it takes out new highs

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SPXS, sds+ most any Tech ETF X3 tends to go UP/ when spy goes \down.
SDOW+ dow , like UDOW ; tends tend to underperform SPY/SPXL\spxs,spxu.
Market closes in about 3 hours; SDOW underperforming spxs again

 

[murray t turtle]

SPXS, today I like TZA best if it takes out new highs

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I got a real good dividend on TZA once /LOL;
but i dont swing trade TZA anymore, swings much wilder than tqqq, for me
SPLV is not a perfect hedge; spxl SSO,sds .......work better for me. JAN Stock Traders Almanac barometer helps for SPY,spxl SSO=good hedge;
up Jan =up 52 week, 88% of the time.,Most likely my sds resting order gets hit today.

 

[morganpbrown]

I like the poor man's covered call for hedging. Buy deep in the money calls with 90+ days to expiration instead of shares and sell covered calls against the long call. The p&l will typically track shares when the stock price rises. When it falls steadily, I typically break even. If the stock price falls radically, the long call could go to zero, but your losses are capped. Spiking implied volatility would make the long call more valuable if the stock price falls and you need to sell it