Aggressive Hedging with CFDs

This article is taken from the YourTradingEdge magazine (SEP/OCT 2011 issue).

Daryl Guppy is a trader and author of ‘Trend Trading’, ‘Guppy Trading’ and eight other trading books. He is a regular guest on CNBC Asia Squawk Box. Daryl is a speaker at trading conferences around the globe and is founder of

  • Daryl Guppy provides three profit-capturing strategies.

Classic hedging is a do-nothing strategy that gives the appearance of your taking action when in fact you are doing little. The classic hedge is designed as an offset – you lose money on one position and make up the loss with the gain in another, related, position. It’s a neutral strategy.

Often the purpose of hedging strategies is to keep a portfolio return matching a benchmark, such as the performance of an index. Neutral strategies use the power of leverage offered by derivative instruments to compensate for losses in less-leveraged stocks and in open positions.

I prefer aggressive hedging. I want to make a profit from my hedge, not treat it as an insurance policy where I surrender the premium irrespective of any claim. That is how options are used in a hedging environment.

I apply hedging strategies only because I am unable, or unwilling, to sell the underlying position. This may be due to investment constraints, superannuation regulations, inability to go short with the stock, or because it is a genuinely long-term investment. My objective is to use a small amount of cash to deliver substantial returns, which are then injected as new capital into investment positions as the market recovers. Such strategies are used to protect portfolios or investment positions.

There are three types of aggressive hedging:

  1. hedging an individual stock;
  2. hedging a portfolio;
  3. hedging a market.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.