Hedging a Portfolio with the Most Volatile Stocks (Correlation vs. Beta)
Hedging a Portfolio with the Most Volatile Stocks (Correlation vs. Beta)
Stocks like Microchip Technology (MCHP), Marvell Technology (MRVL) and Tesla (TSLA) stand out.
Historically, those stocks have tracked the SPY closely with correlations ~0.9+. Take a look at the top right of the graphic below.
But with ~2x the beta, they've moved harder and faster. If you want "leveraged" exposure, trade these. They've been an amplifier of the S&P 500.
Here's the hedge play: In a heavy S&P 500 portfolio, you can take relatively small short option positions in MCHP, MRVL and TSLA. They're so correlated and so volatile that a small short can offset some downside exposure.
If the SPY rallies, you'll lose on the short side of MCHP, MRVL and/or TSLA. If the SPY pulls back and declines, those shorts could pay.
You're using the highest-volatility names to hedge the broader move. There are risks. The relationships can break down. You can lose on both sides.
* Shoutout to our new intern, Thomas Zaborenko, who has been a great partner helping us update our many scripts to access our financial datasets at tastylive.
What's Tom Trading?
We asked tastytrade’s Tom Sosnoff what he’s trading. He gave us the list below. We’ve added the current price along with the 52-week high and low.
Trading Shekel
Take a look at the exotics: You have one of the most volatile currencies right now (US dollar/Israeli shekel) and also one of the least volatile trades (euro / Polish zloty).
On tastytrade, it takes $50 in margin to trade $1,000 worth of shekels.
As the USD/ILS exchange rate declines, the Israeli shekel is strengthening against the US dollar. Foreign Exchange can now be traded directly on the platform.
Here is a chart:
Two Trade Ideas
/CLU5 ($63.99) iron condor (AUG15) $0.52cr
Volatility has come into crude oil significantly since the bombs started falling in the Middle East. "OVX:CGI" is the ticker for the VIX style crude oil volatility index. It went from the 30-35 range up to a high in the mid 70s and is currently bid here at 40. If you think oil might continue to chop in the 60-70 range, an iron condor short the 59/57.5 put spread and the 70/71.5 call spread, trades at $0.52 roughly one-third the width of the strikes.
ETHA ($18.51) short put s pread (AUG) $1.17cr
Currently the only way to get some leverage in Etherium is ETHA, which is the most liquid of the Etherium ETFs. ETH has rallied off the lows but has been stuck around $2,500 for the better part of the last two months. If you’re bullish, consider selling the 18 put and buying the 13 strike wing in August. This trades at around $1.17 and uses only $383 in buying power.
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Michael Rechenthin, Ph.D., (aka “Dr. Data”), managing director of research and development, has 25 years of trading and markets experience. He’s known best for his weekly Cherry Picks newsletter. On Thursdays, he appears on Trades from the Research Team LIVE.
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