• Skip to primary navigation
  • Skip to main content
  • Skip to footer
Daniels Trading

Independent. Objective. Reliable.

Top Navigation

  • Open a Futures Account
  • Sign Up
  • Log in
  • 1.800.800.3840

Primary Navigation Menu

  • About
    • Who We Are
    • Services
    • Careers
    • Risk Disclosure
    • COVID-19
  • Trade
    • Broker-Assisted
    • Self-Directed / Online
    • Request Pricing
  • Hedge
    • Ag Marketing Plan
    • WASDE Analysis
    • Grain Resources
    • Livestock / Dairy Resources
    • Hedging Videos
    • Request Pricing
  • Invest
    • Automated Strategies
    • Managed Futures
    • Request Pricing
  • Advisories
    • GENERAL / FUNDAMENTAL
      • DT Newsletter
      • Insider Market Advisory
      • Turner’s Take Newsletter & Podcast
    • TECHNICAL ANALYSIS
      • The Cullen Outlook
      • Data Feed Trade
      • Jarboe Trading Journal
      • Trade Spotlight
    • AG MARKETING
      • Cattleman’s Advisory
      • The Swine Times
      • Technical Ag Knowledge
      • This Week in Grain
      • Turner’s Take Ag Marketing
    • THIRD-PARTY RESOURCES
      • CFRN
      • Moore Research Center, Inc. (MRCI)
      • OptionWorks®
      • TASMarketProfile.com
  • Education
    • CME Group Resource Center
    • Small Exchange Resources
    • Guides
    • Frequently Asked Questions
    • Order Entry Handbook
    • Webinars
  • Blog
    • Futures 101
    • Ag Marketing
    • Tips & Strategies
    • Trading Advisories
  • Resources
    • Trading Software
    • Quotes and Charts
    • Futures Calendars
    • Contract Specifications
    • Margin Requirements
    • Futures Calculator
  • Accounts
    • GAIN Capital Futures
    • StoneX
  • Contact
 

3 Ways To Manage Your Hedge Exposure

July 18, 2019 by Daniels Trading| Futures 101

Unfortunately, risk is an unavoidable part of life. Whether you’re buying a house or jumping out of an airplane, you assume some degree of risk. In the world of finance, active hedging is like a skydiver’s parachute ― when properly used, catastrophe may be routinely averted. Let’s take a look at three ways of making sure your hedge exposure is optimized and your chute opens.

Know Your Risk

Merriam-Webster defines the term hedge as being “a means of protection or defense.” When it comes to money, this equates to taking an offsetting position in a related asset or derivatives product. Subsequently, a hedger assumes a degree of security at a specified cost.

It may sound like an elementary point, but in order to properly address risk, you must first know which dangers are imminent threats. Here are a few elements of risk that must be quantified in order to successfully manage hedge exposure:

  • Type: When crafting a hedging strategy, the type of risk in question matters. Different approaches will be necessary to adequately address financial, systematic, or producer risks. Understanding which are most applicable to your specific situation is a critical first step in addressing potential hazards competently.
  • Duration: Anytime asset pricing and money are involved, time is an important factor. Being aware of investment horizons and capital allocation schedules are essential. 
  • Unknown Unknowns: In many facets of life, attempting to account for unidentified risks (a.k.a. “unknown unknowns”) is a fruitless endeavor. Nonetheless, when it comes to developing a strong hedge, it pays to take time out and consider as many negative scenarios as possible.

Understanding the type of risk, time horizons, and potential unforeseen hazards are integral parts of building a finely tuned defensive hedge. Through a bit of education, scheduling, and brainstorming, it’s possible to mitigate a large percentage of risks before they become dangerous.

Learn how you can use covered calls to earn additional revenue on top of cash sales. Download our free e-bookHedgers Guide to Covered Calls >>

Account for Counterparty Risk

Depending on the type of market and transaction you’re entering, counterparty risk may or may not be a pressing issue. However, it’s important to at least understand the basic concept and how it relates to hedge exposure.

Counterparty risk is the probability that a participant in a transaction will default on contractual obligations. While not an overwhelming issue in regards to exchange-traded futures and options contracts, some instruments such as credit default swaps carry a higher counterparty risk.

If you’re actively hedging via futures and options, counterparty risk may be greatly mitigated by simply investigating your broker. Finding a competent brokerage service that is licensed, reputable, and in good financial standing is a worthwhile endeavor, and it’s relatively straightforward.

Stay Current!

The world markets are dynamic atmospheres, constantly changing in response to a vast array of stimuli. To ensure that your hedge exposure is maintained at acceptable levels, regular evaluations are necessary. A good place to begin this process is to address the following questions:

  • How is the hedge performing? Subpar performance can be a signal of an inadequate hedge. If “locked in” profits are inexplicably deteriorating, further review is warranted.
  • Am I ignoring any risks? Are the unknown unknowns undermining performance? If so, addressing them as quickly as possible is vital to correcting the problem.
  • Are there any potential game-changers on the horizon? Elections, armed conflicts, or geopolitical tensions can upend almost any market, from corn to crude oil. If uncertainty is likely to dominate the markets, then your hedging strategy needs to be reevaluated.

Sometimes a risk management plan must be amended to bolster performance. Fortunately, futures afford participants the flexibility to change direction quickly to adapt to current market conditions.

Optimize Your Hedge Exposure

If you’re new to hedging, then concepts such as risk types and counterparty defaults may appear a bit mysterious. Fortunately, modern investors have a wealth of resources at their fingertips to help flatten the learning curve.

A great place to learn more about hedging and risk is at the online educational suite offered by Daniels Trading. This collection of blogs, trading guides, and webinars is available absolutely free, 24/7/365.

Hedgers Guide to Covered Calls

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

Subscribe To The Blog

Footer

Site Navigation

  • Frequently Asked Questions
  • About Us
  • Customer Reviews
  • Contact Us
  • Futures Blog
  • Open a Futures Trading Account
  • Media Resources
  • Fund Your Account
  • Legal Notices

Contact Us

Daniels Trading
100 South Wacker Drive, Suite 1225
Chicago, IL 60606
+1.312.706.7600 Local / Int'l
+1.800.800.3840 Toll-Free
+1.312.706.7605 Fax

Connect with Us

Trustpilot

Copyright © 2021 · Daniels Trading. All rights reserved.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

  • Risk Disclosure
  • Privacy Policy
  • California Residents Privacy Notice
  • Terms of Use
  • Back to top