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Contracts for Difference or CFDs can be used as a powerful risk protection tool for those who understand the power behind this simple investment product. Today we’ll have a look at 2 main ways to hedge your portfolio using Contracts for Difference.
- Hedging individual stock positions
- Partial hedge of a gold CFD position
Hedging individual stock positions
Most traders starting out look to generate short term gains using CFDs and like to take advantage of the powerful leverage that Contracts for Difference allow. There is also a group of investors who love the simplicity of using CFDs as a risk protection strategy on their existing portfolios. You might have 5,000 AMP shares and you think that their price has had its run but you don’t wish to sell your physical stock for capital gain reasons or perhaps even due to the dividend yield.
As a result you could short sell 5,000 AMP CFDs at market, locking in the current price on AMP. Let’s say you were right and AMP falls $1. Your stock position would lose $5,000 but your Short sold CFD position would gain $5,000 plus you would earn a small amount of interest. This enables you to protect your existing portfolio without having to sell the physical stock
Partial hedge of a Gold CFD position
With the recent exiting movements in gold it wouldn’t be uncommon for traders to look at Lihir Gold or Newcrest mining as a great trading opportunity. Due to the ASX closing at 4.10pm Australian time it can leave you exposed to unnecessary risk as Gold begins trading in Europe and then across North America. Let’s say you are long Newcrest Mining CFDs and overnight a big announcement comes our regarding gold and drives the price of Gold down $30. More than likely your Newcrest Mining position is going to gap down on open the next day and cause you a larger than expected loss.
Instead of being reactive in your portfolio management you can implement a more active management style by shorting Gold CFDs overnight. This can be made even easier with the ability to place conditional orders with OCO profit targets and stop losses to let you sleep at night.
Keep in mind this is a partial hedge only as there are many occasions when the price of gold may in fact fall overnight and the Newcrest Mining stock actually rises. As a result you need to make sure you implement solid risk management strategies when implementing this partial hedge.
As you can see, CFDs can be a powerful risk protection tool that attempts to minimize your risk and reduce your exposure. Using CFDs in this manner can be quite a smart strategy.
Action: Discover the 7 most Critical CFD Trading Tips and 2 of the most common CFD Trading Strategies. Learn more about the Contracts for Difference (CFD) revolution by going to http://www.learncfds.com/
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