2 Simple Ways to Hedge Risk in Futures
Sep 20, 2021
By: Frank Kaberna
When you go to buy something in the market, an innate sense of fear can kick in just long enough to delay your purchase by a few seconds:
What if the market moves lower? What if it moves lower by A LOT?? What if the market GOES TO $0?!?
Though markets outside of penny stocks actually reach $0 with great rarity, the risk is real and should be treated as such. So, how can you mitigate it? Here are two easy ways to adjust your risk when trading futures.
The first, most obvious way to reduce risk in your long strategies is by reducing the number of dollars that stand between your entry price and $0. Take, for example, last week’s crash in metals.
SPRE \ Small Metals Futures
Simply starting with a smaller futures product (like mini, micro, or small futures) can help take the edge off when stressing your next big buy. Not only are futures capital efficient, but they are also the most direct way for retail traders to access commodities like metals, and there are Gold futures, Micro Gold futures, and Small Precious Metals futures.
Distance from Here to $0
Micro Gold Futures
Small Metals Futures
After reducing size, you can offset exposure while adding daily theta decay with options. Selling 30 delta's worth of calls in a highly correlated ETF like GLD can make all the difference, and, in this example, it would theoretically bring a $1,000 range down to $700 so far in 2021.
SPRE \ Small Metals Futures with 30% Hedge
The math relating SPRE futures to GLD options ([Small Price/ETF Price]*Delta Hedge) translates to about 13 deltas in short GLD call options, which can easily be done via a vertical credit spread.
Last-minute fear must be overcome to jump on long opportunities that arise amid a crash. While that feeling may always be there, your reluctance can be quelled by the right product and hedge.
Follow us on Twitter: https://twitter.com/small_exchange
Subscribe to our YouTube Channel: https://www.youtube.com/channel/UC5pAsul3H_7FYuPmZscClrA
© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in options, futures, and ETFs is not suitable for all investors. The risk of loss in the trading of options, futures, and ETFs can be substantial. Trading in derivatives and other financial instruments involves risk. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
Sep 14, 2021
It’s become clear that attempting to understand the crypto market by comparing it to popular existing indexes is as lazy as describing an athlete’s talent or musician’s sound in terms of another athlete or musician. It doesn’t get to the root. Read more from Frank Kaberna regarding the cryptocurrency market.
Sep 7, 2021
Has the mixture of the Federal Reserve and monetary controls taken risk out of the market? Will S&P 500 Volatility Index readings of 30, 40, and 50 become a thing of the past? Are put options on stocks headed to free? Frank Kaberna explores in this article.
Sep 2, 2021
Many are starting to write off the formerly burgeoning pot stock sector completely as it reaches territory travelled just 25% of the time in the last three years. But could there be growth potential for those willing to hold pot stocks through their current rough patch?
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.