Can someone please give me a real world example of hedging please?

[sopodo]

Okay guys,

I have read up a lot on hedging and understand the basics but when the examples come a long I am a little lost.

I also got some questions I hope you can please answer:

I take it there is no point hedging if you are scalping for 3-5 tick profits?

I hear some people buy a emini futures contract, but then hedge in a stock to protect losses that may occur in the futures contract, is this correct?

I wanted to do more simple hedging in the same futures contract, if possible...My idea was that, I buy a emini s&p 500 futures contract and then say go for a 10 tick profit. Then I also take out a hedge position in that futures contract so I can lock in my profits. For instance if I think it's a bullish trend. I take out a long futures contract. Then I am looking to ride the trend hoping I could sell at a big future price to maximize my profit per trade. At this point I don't set a stop profit limit. But I set my stop loss for 5 ticks down. I do this so I don't get out of the trade prematurely. As based on that given point due to technical analysis I believe that the price is going to rise heavily. Then say the index rises by 10 ticks and I don't want to sell which is also known as unrealized gain. Then I can hedge my position at 10 ticks so if the future price went up more to say 15 ticks and say I still didn't sell, or say I did go to sell my order but it didn't get filled and then suddenly the price plummets by going down by 10 ticks which would be 5 ticks above the price I bought the contract at. But as I hedged my position at 10 ticks above the price I bought the contract at, my profits are locked in at 10 ticks per contract. Then I can sell now and I am guaranteed a complete fill.

Is this how hedging works or am I totally confused?

Any help much appreciated

Many thanks in advance

 

[Rhody Trader]

I take it there is no point hedging if you are scalping for 3-5 tick profits?

Absolutely none.

I hear some people buy a emini futures contract, but then hedge in a stock to protect losses that may occur in the futures contract, is this correct?

You got that backwards. You'd use the index to hedge against general market movements while holding a stock or portfolio position.

I wanted to do more simple hedging in the same futures contract, if possible...My idea was that, I buy a emini s&p 500 futures contract and then say go for a 10 tick profit. Then I also take out a hedge position in that futures contract so I can lock in my profits.

That's not hedging. It's offsetting and closing your position. If you did it you'd find yourself flat - no position.

 

[MartinP64]

Dear Sopodo

If you want to learn about hedging, you need a doctor degree in math. It is all about calulation. Without that, 99% of chances u will lose. Like the gov said. 90% of the people lose trading in the futures market. Those that wins develop their own system based on math

 

[gooseman]

this place is getting worse

 

[scose-no-doubt]

Can you give me an example of how it is getting worse please?

 

[gooseman]

where's ODT when you need a prime example....

 

[scose-no-doubt]

repping my posts

 

[NadirTradenext]

Okay guys,

I have read up a lot on hedging and understand the basics but when the examples come a long I am a little lost.

I also got some questions I hope you can please answer:

I take it there is no point hedging if you are scalping for 3-5 tick profits?

I hear some people buy a emini futures contract, but then hedge in a stock to protect losses that may occur in the futures contract, is this correct?

I wanted to do more simple hedging in the same futures contract, if possible...My idea was that, I buy a emini s&p 500 futures contract and then say go for a 10 tick profit. Then I also take out a hedge position in that futures contract so I can lock in my profits. For instance if I think it's a bullish trend. I take out a long futures contract. Then I am looking to ride the trend hoping I could sell at a big future price to maximize my profit per trade. At this point I don't set a stop profit limit. But I set my stop loss for 5 ticks down. I do this so I don't get out of the trade prematurely. As based on that given point due to technical analysis I believe that the price is going to rise heavily. Then say the index rises by 10 ticks and I don't want to sell which is also known as unrealized gain. Then I can hedge my position at 10 ticks so if the future price went up more to say 15 ticks and say I still didn't sell, or say I did go to sell my order but it didn't get filled and then suddenly the price plummets by going down by 10 ticks which would be 5 ticks above the price I bought the contract at. But as I hedged my position at 10 ticks above the price I bought the contract at, my profits are locked in at 10 ticks per contract. Then I can sell now and I am guaranteed a complete fill.

Is this how hedging works or am I totally confused?

Any help much appreciated

Many thanks in advance

well I would say hedging is simply just a safety net. for example the dollar and gold work as an inverse so if the economy of USA is high then you would but the dollar however if it then drops then you could buy some gold to cover yourself.

 

[Mr. Charts]

this place is getting worse

It used to be called the "silly season".........and it is.

 

[Mr. Charts]

Here's a good site where you can learn more:

www.HedgesDirect.co.uk

 

[sopodo]

Here's a good site where you can learn more:

www.HedgesDirect.co.uk

LOL

On a serious note, I made this thread because I wanted to become better educated on hedging. I had read tons of information on it. Thought I understood it, but it seems I don't. The answers I got in here are very confusing. From internet searches I don't seem to be able to find that much info on an actual hedging example in the futures market. Unless I am doing a wrong search term.

My understanding is that all that hedging a position does is reduce your losses. So with that said, how can I take a for instance a long position to buy a contract in the emini s&p 500 and go for say 20 tick profits and then hedge in the same instrument to protect my losses if I go for unrealized gain. If that is how it works???

If not, can anyone please offer me a easy step by step guide to how you hedge in the emini futures market?

Any help much appreciated

Many thanks in advance

 

[gedward3]

Bring back Spanish89 and his Cats Ears.

I actually miss that period on T2W.

Gotta say i dont think i ever laughed so much at some
of the **** he came out with.

Could never find that picture he posted in them sh1t stained keks posing in
front of the mirror. Can someone do the honours pleeeeaaaassssee.

:clap::clap::clap:

 

[scose-no-doubt]

LOL

On a serious note, I made this thread because I wanted to become better educated on hedging. I had read tons of information on it. Thought I understood it, but it seems I don't. The answers I got in here are very confusing. From internet searches I don't seem to be able to find that much info on an actual hedging example in the futures market. Unless I am doing a wrong search term.

My understanding is that all that hedging a position does is reduce your losses. So with that said, how can I take a for instance a long position to buy a contract in the emini s&p 500 and go for say 20 tick profits and then hedge in the same instrument to protect my losses if I go for unrealized gain. If that is how it works???

If not, can anyone please offer me a easy step by step guide to how you hedge in the emini futures market?

Any help much appreciated

Many thanks in advance

get a financial engineering undergrad book and start slowly from there. This isn't something you just wikipedia and then have a bash at.

 

[sopodo]

get a financial engineering undergrad book and start slowly from there. This isn't something you just wikipedia and then have a bash at.

Many thanks for your reply

Okay then it seems that from everyone's replies in this thread, hedging isn't something I should be thinking about right now.

But tell me this please, my understanding is that hedging is used to reduce your losses, and that's all it's for. But then to actually do it, you need some real top education to calculate things out. Am I right?

 

[gedward3]

Many thanks for your reply

Okay then it seems that from everyone's replies in this thread, hedging isn't something I should be thinking about right now.

But tell me this please, my understanding is that hedging is used to reduce your losses, and that's all it's for. But then to actually do it, you need some real top education to calculate things out. Am I right?

If BP are taking raw oil and making the various products by refining and producing the various products that derive from this known as "cracking". They will produce heating oil, petrol and jet fuel and some other products.

They will know their costs to refine that oil and by working with the local futures exchanges can calculate their profit by now selling the relevant futures contracts into the market right now. If in January they start refining and know they can sell this at market in March they will sell say Gasoline contracts for delivery in March and know their profit.

March comes and they can either deliver the gasoline direct to who bought the futures contract and the exchange settles with BP or they can buy the contract back to square out the position. They can do this with and EFP Exchange of Physicals for Payment or and EFC Exchange of Physicals for Contract and make the adjustment to the contract on the exchange to square off on the open interest.

1 very brief detail of hedging from a producers point of view albeit short and sweet.

If you need more. Read a book.......

Ged

 

[sopodo]

If BP are taking raw oil and making the various products by refining and producing the various products that derive from this known as "cracking". They will produce heating oil, petrol and jet fuel and some other products.

They will know their costs to refine that oil and by working with the local futures exchanges can calculate their profit by now selling the relevant futures contracts into the market right now. If in January they start refining and know they can sell this at market in March they will sell say Gasoline contracts for delivery in March and know their profit.

March comes and they can either deliver the gasoline direct to who bought the futures contract and the exchange settles with BP or they can buy the contract back to square out the position. They can do this with and EFP Exchange of Physicals for Payment or and EFC Exchange of Physicals for Contract and make the adjustment to the contract on the exchange to square off on the open interest.

1 very brief detail of hedging from a producers point of view albeit short and sweet.

If you need more. Read a book.......

Ged

Many thanks for explaining hedging in quite some detail, it looks pretty complex. I will have to reread all that and definitely look into this further, perhaps a book would be a good idea.

Thanks again

 

[GammaJammer]

Many thanks for your reply

Okay then it seems that from everyone's replies in this thread, hedging isn't something I should be thinking about right now.

But tell me this please, my understanding is that hedging is used to reduce your losses, and that's all it's for. But then to actually do it, you need some real top education to calculate things out. Am I right?

What you're talking about when you say hedging is what the unenlightened call it. If you're using the exact same instrument, as has already been pointed out, you're not 'hedging' you're closing a position. It's just that retail traders have, of late, taken to giving this process a fancier sounding name to make them sound like they're doing something complicated. Not a dig at you in any way, just be aware that hedging in the real world is a different thing to just buying some S+P futures and then selling some (same expiry).

Usually, and in VERY broad terms, hedging is the act of mitigating SOME ASPECT of your portfolio risk by taking a position in an instrument that has an expected correlation with some part of your existing exposure. Thus for example a US investor with an overseas equities portfolio will have exposure to both the fluctuations in the price of the shares, and also the variations in FX rate (as once the shares are sold the local ccy proceeeds will need to be converted back to USD before profits can truly be said to have been realised.

Say this invstor was the world's greatest stock picker, but had no real feel for / interest in the currency movements. He / she could hedge the currency risk out by buying usd / selling local ccy, usually in the forward or futures markets as the idea isn't to take delivery of the actual currency while the equity position is in place (merely to have a trade in place that tracks the exchange rate more or less).

thus if you buy JPY 200 bio worth of japanese equities, you would buy usd/jpy on a forward basis in the equivalent size. Thus, any fall in the value of the jpy would reduce the amount of money your japanese equities are worth (in dollars) but at the same time you would see an equal and offsetting profit on the fx hedge.

It's not as simple as that of course, as forward fx positions assume interest rate basis risk, credit risk (herstat risk) etc.

But thats the KIND of thing pros are talking about when they say hedging. Not removing ALL your risk, as that means you're FLAT. Just removing / reducing the parts of your risk that you are less able to understand / predict / control.

make sense?

And by the way, you don't necessarily have to be a maths PHd to understand all that, despite what the other poster says. Total horse plop. There are basic concepts here anyone can grasp.

GJ

 

[gedward3]

Many thanks for explaining hedging in quite some detail, it looks pretty complex. I will have to reread all that and definitely look into this further, perhaps a book would be a good idea.

Thanks again

Sopodo,

I was joking about the book mate. Google has everything you need these days from basic stuff to thesis by academics.

http://www.selftrade.co.uk/research-education/learning-zone/cfds-spreadbetting/hedge.php

http://bannronn.com/market_basics/futures/hedging_using_futures_contracts.html

http://www.sempracommodities.com/oil_producers.asp

Ged

 

[gedward3]

What you're talking about when you say hedging is what the unenlightened call it. If you're using the exact same instrument, as has already been pointed out, you're not 'hedging' you're closing a position. It's just that retail traders have, of late, taken to giving this process a fancier sounding name to make them sound like they're doing something complicated. Not a dig at you in any way, just be aware that hedging in the real world is a different thing to just buying some S+P futures and then selling some (same expiry).

Usually, and in VERY broad terms, hedging is the act of mitigating SOME ASPECT of your portfolio risk by taking a position in an instrument that has an expected correlation with some part of your existing exposure. Thus for example a US investor with an overseas equities portfolio will have exposure to both the fluctuations in the price of the shares, and also the variations in FX rate (as once the shares are sold the local ccy proceeeds will need to be converted back to USD before profits can truly be said to have been realised.

Say this invstor was the world's greatest stock picker, but had no real feel for / interest in the currency movements. He / she could hedge the currency risk out buy buying usd / selling local ccy, usually in the forward or futures markets as the idea isn't to take delivery of the actual currency while the equity position is in place.

thus if you buy JPY 200 bio worth of japanese equities, you would buy usd/jpy on a forward basis in the equivalent size. Thus, any fall in the value of the jpy would reduce the amount of money your japanese equities are worth (in dollars) but at the same time you would see an equal and offsetting profit on the fx hedge.

It's not as simple as that of course, as forward fx positions assume interest rate basis risk, credit risk (herstat risk) etc.

But thats the KIND of thing pros are talking about when they say hedging. Not removing ALL your risk, as that means you're FLAT. Just removing / reducing the parts of your risk that you are less able to understand / predict / control.

make sense?

And by the say, you don't necessarily have to be a maths PHd to understand all that, despite what the other poster says. Total horse plop. There are basic concepts here anyone can grasp.

GJ

What he said whistling:whistling

 

[scose-no-doubt]

And by the way, you don't necessarily have to be a maths PHd to understand all that, despite what the other poster says. Total horse plop. There are basic concepts here anyone can grasp.
GJ

I was thinking options. This guy always talks about options.