Hedging with futures

As anxiety over the AI trade increases and volatility in crypto spikes, traders who have a long-term bullish outlook on their holdings but have near-term concerns about downswings can use futures to manage risk. As their holdings lose value, a short futures contract would gain in value, offsetting some of their losses.

Because of the leverage futures offer, a relatively small initial margin requirement can hedge a large portfolio, though regardless of the size of the position you want to hedge, a variety of contract sizes are available.

Long-term investors looking to protect their retirement portfolio holistically could use S&P 500 Index futures to hedge against downside risk.

If, however, you’re specifically concerned about AI risk or a downturn in the Magnificent 7, given that roughly 70% of the Nasdaq 100 consists of either a Mag 7 or tech stock, selling Nasdaq 100 futures contracts could offer a broad hedge against a potential AI downswing.

For traders with a large concentration of crypto, cryptocurrency futures are also available for a wide variety of coins, including bitcoin, ethereum, XRP, solana, cardano, lumens, and chainlink.

This summer, CME Group plans to launch Single Stock futures on more than 50 of the top US stocks, which will allow traders to further tailor their hedge for a large exposure in Nvidia, Alphabet, Meta, and more.

THE TAKEAWAY

While the primary purpose of hedging is to offset risk, hedging itself isn’t entirely without risk. There’s always a possibility that your position will move to the upside, in which case, the loss on your short position will eat into the gains on your long position. For this reason, traders might choose to hedge only a portion of their portfolio.

Ultimately, hedging functions a lot like insurance: while you hope you never have to use it, during an unfortunate event, you’re very glad to have it.

( I never traded futures, would need an elementary level of training before I understand the mechanics of hedging)