A hedging is designed to protect the value of a share of market volatility. Hedging strategies may include derivatives, short selling and diversification. Coverage usually involves placing a trade or investment in an asset that moves in the opposite direction of stock prices. Therefore, when the stock price falls, the coverage should increase in value, offsetting the loss.
Derivatives, such as options and futures, can be used for hedging purposes. Several strategies of options are available to cover stock positions. For example, a put option contract – that gives the trader the right to sell the underlying stock at a particular price before the expiration date – rises in value if the stock price falls, thus covering the original position. Eric Dash of The New York Times mentioned collars as another option strategy that limits the profit potential both on the upside and the downside risk.
Futures Hedging Strategies:
Short selling is a hedging strategy involves borrowing a financial instruments and selling it in the hope of buying back later when the price falls. Investors cannot hold long and short positions of the same stock in their portfolios. However, little can stock indexes to cover their equity positions, according to Tom Konrad. For example, an investor holding large Indian stocks could short the Nifty index of protection against a market downturn. Shorting is simpler index options and there is no expiration date for concern, although there is potential for a strong market up which could result in significant losses.
Another hedging strategy is Diversification, which means holding investment positions in companies of various sectors of the industry, is a form of natural hedging. The advantage of diversification is that it acts as a natural hedge, if a population suffers, the entire portfolio does not take a hit. Investors can also invest in stocks that move in opposite directions. For example, David Bogslaw of Business week magazine writes how investors can hedge against inflation – which negatively affects profit margins and stock prices – to invest in assets that keep their values, such as services public, gold and real estate.
Goldman Sachs partners and executives from other companies use hedging to protect possible losses on their securities holdings, Dash writes. The concern is that executives might be tempted to take unnecessary risks and losses that are protected on the downside, unlike those of ordinary shareholders.
Futures Hedging Examples:
The use of futures to hedge stock futures trading involves contracts to provide compensation gain if the market drops significantly. Futures hedging are used to protect the value of a portfolio of large values, a value of Rs. 200,000 or more. Futures trading allows a trader to make financial bets on the future direction of stock indices, with a relatively small investment. Coverage includes the US futures trading to take advantage of falling market values shares.
To determine that the index futures traded shares closer you get to the performance characteristics of its portfolio. Futures trading against the following stock indexes: S & P 500, Russell 2000, Dow Jones Industrial Average, NADSAQ 100, S & P 600, S & P Midcap 400, NASDAQ Composite, S & P 500 Growth Index and the S & P 500 Index Value. For a broadly diversified portfolio of stocks, the S & P 500 could be a common choice. A heavy portfolio in technology stocks could be covered by the Nasdaq 100 futures.
Open and fund a futures trading account. The futures registered runners are traded on the National Futures Association – NFA – and the Commodity Futures Trading Commission – CFTC. Most brokers do not offer futures trading, and brokers dedicated future will be more useful for new traders’ futures trading.
In order to cover the value of your portfolio, one is required to calculate the number of futures contracts. Each futures contract is worth a multiple of the selected stock index. The value of the main futures contracts are 250 times the index value for the S & P 500 index, 50 times the rate in the mini ES & P 500, the Nasdaq 100 100 times and 20 times for the e-mini NASDAQ 100. In 1350 values for the S & P 500 and 2,400 for the Nasdaq 100 futures contract each of the four listed would be worth dollar 337,500, 67,500, 240,000 and 48,000 respectively. For example, a USD dollar 200,000 stock portfolio full of technology stocks could be covered with four e-mini NASDAQ 100 futures contracts.
Sell short the calculated futures contracts in your futures account when you believe the stock will go down number. Futures trading can be opened with either a purchase or sale; by selling futures to open a trade if the market declines will benefit. A margin deposit for each futures contract locked himself in his futures trading account. Margin for the e-mini Nasdaq 100 is around 10% of contract. E-mini contract will earn for every point that the Nasdaq 100 stock index decreases sold.
Close futures positions and lock in profits with purchase orders when you believe that the market has reached the lowest point of the current decline and begin to move in an upward direction.
- Tutorial Course - Basics of Futures Trading for Beginners -
» e-Learning Chapter 1: What is Futures Contract and Types of Future Contracts?
» e-Learning Chapter 2: What is Futures Trade and How to Trade in Future Markets?
» e-Learning Chapter 3: What is Leverage and Payoff? Definition with Example.
» e-Learning Chapter 4: What is Shorting or Short Sale? Definition and Rules.
» e-Learning Chapter 5: What is Nifty Futures and How to Trade in Nifty futures?
» e-Learning Chapter 6: What are Futures Prices? Definition and Effects of Dividends.
» Currently Reading: What is Hedging? Examples and Hedging Strategies.
» e-Learning Chapter 8: What is Open Interest? Examples and Analysis.
» e-Learning Chapter 9: What is Margin and M2M (Mark to Market)?
» e-Learning Chapter 10: What is Margin Trading? Advantages and Risk of Leverage.
» e-Learning Chapter 11: What is Hedger, Speculator and Margin Calculation?
» e-Learning Chapter 12: Futures Trading Quiz – Basics of Futures Trading for Beginners.