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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

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

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