It isn’t clear whether the current stock market falls are beginning to sustain a bearish market or a temporary bull market bullish market pullback, experts predicts that investors are still not in the bear market territory just yet. Either way, investors ought to be familiar with the ways to hedge themselves against short-term threats using contracts for difference (CFD). More specifically, the insidious danger that individual stocks might probably fall off a precipice is a risk traders of any kind should wisely consider.

Following the oil spill, a lot of people saw several thousands of portfolios literally being wiped out as BP declined over £6.50 to £2.90 within two months. Investors who are familiar with the derivatives foresee this as a perfect hedging opportunity to hold the physical and sell the derivative.

If you have a portfolio of blue chip shares and are worried about much broader market weakness, short selling the equivalent pound amount of FTSE100 CFDs can be a better option. For instance, if you have £115,000 worth of shares, then selling two FTSE CFD contracts with the market at 5,800 will give you an exposure of 5,800 times £10 per point times two contracts which is equivalent to £116,000. If the FTSE should decline 10 per cent you can profit on going short which theoretically will offset the majority of losses on your physical portfolio.

A plain 1:1 ratio hedging is not the only choice available. Putting too much stress on short CFDs is an option should the market look bad. Utilising this technique to cover 100 per cent short term downside risk to the long portfolio and make a profit by being about 20 per cent overweight short CFDs-100/short 120.

Using CFDs to hedge equity position is a very useful technique for many investors, however the existing risk is doing so should never used to hold onto a losing position. Selling out the physical shares and looking at your position with a fresh pair of eyes is the best way of doing things. This sort of preference is ideally a much safer way to exit the underlying, rather than keeping the underlying hedge.

In the latest outlook, despite the sluggish growth, major markets should really avoid a double dip recession. If this is right investors won’t probably need to short any major indices any time soon. However, if you have a long-term investment tied up in the FTSE 100 and one of its top constituents has a failure of that kind that spoiled BP. A straightforward short-term hedge CFD hedge should safeguard your position or it could up the ante that might turn up good returns in profit.

Last Updated: January 22nd, 2021