Single stock hedging techniques.
Portfolio hedging and diversifying your assets are essential strategies for anyone looking to achieve their financial goals, especially in times of economic unrest. Every day our portfolios are open to risk. Some days there are more risks than others. For example, in a time of global unrest triggered by the Coronavirus pandemic, markets such as oil are unpredictable. Energy markets, such as crude oil and gas, are volatile, and producers are hedging. In this article, we will uncover what it means to hedge your concentrated portfolio to protect against major loss. For more information on single stock hedging, global markets, and wealth management, contact Alpen Partners below.
Whether there is a global pandemic threatening the markets we rely on or not, portfolio hedging is a strategy that any investor needs to consider. All portfolios are subject to risk, especially a concentrated portfolio. When a market is in a time of high volatility, the value of an investor’s asset can hit the floor. In times of economic uncertainty, such as the one we face with Coronavirus, oil prices are playing a significant role in the economy overall, and investors are beginning to think of ways to protect their wealth. Hedging is a strategy in which an investor uses instruments, often derivatives to offset unwanted price change.
Portfolio hedging consists of techniques that lower an individual’s exposure to financial risk. Some see hedging as a kind of insurance. In order to hedge, investors will make certain investments that may protect them from significant losses. These techniques, which often consist of contracts such as futures and options, are usually organized by professional wealth managers as it is considered to be an intermediate to expert strategy. The biggest goal of hedging is not to make more money. It is to lower the significance of a financial loss when a market is underperforming. There is often a price tag that comes with hedging, but it is nowhere near the price an investor will pay if they don’t have a proper hedging plan.
Single Stock Portfolio Hedging Against Spike in Oil Proces
Now that we understand the importance of hedging during times of market volatility, let us take a brief look at some hedging techniques utilized by oil producers in times of market volatility. Not every method is going to work for every person, so it is vital to call upon the guidance of a professional to ensure you create a plan that works for you.
Call Options- An option is a strategy that involves a purchaser earning the opportunity to, but not obligated to, purchase, or sell an amount of an asset on or before a predetermined date. It will allow the investor to lower their exposure to rising prices.
Put Options- A put option is a type of option that will allow investors to hedge against declining prices.
Futures- A futures contract is a straightforward contract between two parties used to buy or sell an amount of a commodity for an agreed-upon price that will take place at a specified later date. In a futures contract, both the buyer and the seller are obligated to buy and sell at the price they agreed upon when the date arises. Typically, futures are used as hedging and are bought back or sold back before the expiration date and very few results in delivery.
Swaps- In a swap contract, one party exchanges exposure to a market fuel price for a fixed fuel price over a certain period of time. Commercial and industrial fuel consumers in various industries often use swaps to hedge their fuel price risk by locking in their fuel costs. Oil and gas hedging strategies allow producers to reduce the impact of unpredicted prices decline, known as price risk. This is why swap contracts, futures contracts, and fixed-price physical contracts are often utilized to lock in the price the producer will earn in the marketplace. This method, however, may stop them from benefiting when the price rises.
Hedging with Alpen Partners
Alpen Partners offers its customers the opportunity to hedge their portfolios through the use of naked shorts and long-dated put options. Using the derivatives specialists of our partner banks, we set up hedging strategies that protect our clients’ holdings while giving them some flexibility in terms of liquidity. Using one of the leading institutional trading platforms in the world, we offer our clients the ability to build a portfolio that will take advantage of the upcoming downturn of the credit cycle and/or hedge their current long exposure.