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Doomsday Prepping for the Next Six Months

by Frank Kaberna| Tips & Strategies

The stock market is off to one of its more volatile years in recent history, and it’s showing little sign of stabilizing. At the halfway point of 2020, the Small Stocks 75 Index has already posted a high-to-low range exceeding the ranges of each of the last four years, and it has shown 13 daily moves exceeding 5% in either direction and 23% more unique price levels than the average full year of trading going back to 2016.

Doomsday Prepping for the Next Six Months
Small Stocks 75 Index

Yet stocks are, for the most part, back to unchanged on the year, and Small Stocks 75 in particular is only a few percentage points away from where it started in 2020. This environment can create frustration for passive investors witnessing heightened volatility with little, if any, growth in investment.

Passive market participants might feel paralyzed by long stock portfolios set to profit in the long term that are susceptible to daily volatility in the short term. Those seeking returns from owning stocks for multiple years can reduce exposure without uprooting investment in times of fear by using capital-efficient futures products.

How to Hedge Stocks with Futures

Selling small, cost-effective futures at reduced rates relative to stocks can hedge long stock portfolios with more flexibility than large, traditional futures. The number of contracts to commit to the hedge depends on the trader’s stock portfolio value, the percentage of the portfolio they wish to hedge, and some simple futures math:

Number of Contracts = [ Portfolio Value X Hedge Percentage ] / [ Futures Price X Multiplier ]

While traditional stock futures have varying multipliers ranging from quarters to hundreds of dollars, all Small Exchange futures observe the same $100 multiplier.

2020’s Second Half Outlook

There’s no telling how volatile the second half of the year will be or where the stock market will conclude in 2020, but the long-term investor will most likely encounter short-term rallies and declines similar to the last six months. Having the ability to actively manage risk could prove useful if the uneasiness in equities continues.

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About Frank Kaberna

Frank Kaberna is the head content strategist at the Small Exchange. He produces everything from brochures to videos that inform on the Small Exchange’s products. After earning a mathematics degree from the University of Michigan, Frank traded interest rates at the Chicago Board of Trade. He then worked on the tastytrade Network as a content producer and on-air talent before landing at the Small Exchange.

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.