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.
|Gold Futures||Micro Gold Futures||Small Metals Futures|
Source: Data as of 9/16/21 CME Group (https://www.cmegroup.com) and Small Exchange (https://smallexchange.com)
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
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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© 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.