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Hedging Risk in Futures

by Frank Kaberna| Tips & Strategies

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?

Managing Risk with Product Awareness

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

Source: dxFeed Index Services (https://indexit.dxfeed.com)Simply starting with a smaller product can help take the edge off when stressing your next big buy. Futures are the most direct way for retail traders to access commodities like metals, and there are Gold futures, Micro Gold futures, and Small Metals futures.

Distance from Here to $0
Gold Futures Micro Gold Futures Small Metals Futures
$175,000 $17,500 $7,000

Source: Data as of 9/16/21 CME Group (https://www.cmegroup.com) and Small Exchange (https://smallexchange.com)

Gain exposure to popular markets with standardized tick values and expiration dates on the Small Exchange. See why the smalls are making a big splash. >>

Hedging Futures with Options

After reducing size, you can offset exposure while adding daily theta with options. Selling 30 deltas worth of call 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

Source: dxFeed Index Services (https://indexit.dxfeed.com)

The math relating SPRE futures to GLD options ([Small Price/ETF Price]*Delta Hedge) translates to about 13 deltas in short GLD calls, which can easily be done via a 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.

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To learn more about how the Small Exchange is merging the efficiency of futures with the clarity of stocks, make sure to subscribe to their YouTube channel and follow them on Twitter so you never miss an update.

© 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 futures involves the risk of loss, including the possibility of loss greater than your initial investment.

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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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