Finance Professor: Five Hedging Techniques You Must Know
06/21/07 - 05:37 PM EDT
Scott Rothbort
- The Spyders: Recalling that the sample portfolio had risk of $2,619,000 vs. the S&P 500 Index. The S&P 500 ETF, commonly called the "Spyders" (SPY Quote - Cramer on SPY - Stock Picks), is a trust that replicates the S&P 500. The Spyders are now selling for about $153 per share. Thus, you can short 17,117 shares of SPY ($2,619,000 / $153) to hedge your sample portfolio.
- Sector-specific ETFs: If you are trying to hedge an individual stock, you may want to utilize a sector-specific ETF to achieve our risk management objectives. For example, I own CVS Caremark (CVS Quote - Cramer on CVS - Stock Picks). CVS is a component stock in the Retail Holdrs ETF (RTH Quote - Cramer on RTH - Stock Picks). I could hedge out some of my CVS risk by short-selling the RTH.
- Inverse and levered inverse ETFs: Whole new classes of negative correlating ETFs have been recently listed. These ETFs allow you to buy downside protection in an index. Using the SPY as an example, the Short S&P 500 ProShares (SH Quote - Cramer on SH - Stock Picks) and the Ultra Short S&P 500 ProShares (SDS Quote - Cramer on SDS - Stock Picks) will appreciate as the SPX declines and will decline when the SPX increases. The SDS provides a double leverage impact on movements in the SPX.
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