Beta Weighting Hedging - YouTube

Hey everybody its Hari Swaminathan, welcome to the free course library. In

this mini course, we are going to look at how you can hedge a per your portfolio

with one spider trade. So let's back up a little and see why we would need to use

this in the first place, so let's say we add a portfolio of which is a

combination of stocks as well as options. So as you can see here Apple I have some

stock I have 200 shares shows a little bit of profit,

I have Amazon which is options we have a call spread here has a bit of loss.

Then same thing on FedEx, Google, we have some options positions so you know a

normal portfolio might look like something like this. You have a few

stocks, you might have a couple of options positions and now you're

concerned that the overall market might take a downward trend. For whatever

reason so you know as of now in the middle of August, we are looking at the

russia-ukraine crisis. So you have this portfolio you don't want to close

everything out but you want to position yourself in such a manner that even if

the markets take a crash either next week or any time, your portfolio is not

going to get affected a whole lot. The way you do that is you can see now in

terms of your Delta, I mean stocks have full hundred Delta so

basically if you have 200 shares you have 200 Delta. Because if the stock goes

up by one dollar then, you know your Apple shares will be up by $200 because

you have 200 shares. But options are different depending on which strike

price you have, your deltas are going to be different. If you just looked at

the raw deltas you have 200 Delta's on Apple, you have 154 on Amazon, you have

131 on fedex and 108 on google. But the deltas of all the stocks on

not the same, so you know the Apple Delta is not the same as Amazon Delta. So one

Delta on Apple is not the same as one Delta on Amazon because both have

different correlations to the overall market. So you would want to better

wait this portfolio to the spider which is the overall market, so by when you

beta weighed the concept of beta waiting is that each individual stock has its

own beta which is the correlation to the overall markets. So when you beta

wait it to say the spider then what you're doing is you're reducing every

stock. It's beta you mean the platform obviously calculates all of

this for you but the platform will calculate the beta of each of the stocks

in this portfolio. It will take its beta into account and it will reduce it

to a common spider level Delta. So basically, if we do this if I beta weight

it now, you can see in terms of the spider we would need eight hundred and

sixty-one deltas on the spider. So which means we

can now come to the spider and say if you wanted we know we have positive

eight hundred and sixty-one Delta. If you if we wanted to beta weight this and

make it delta-neutral on the spider, we would have to buy a certain amount of

spider put options. We would buy put options because we have positive Delta

here and therefore to neutralise it you would want to buy the spider put options.

Let's go take a look at the spiders and let's say we wanted to

give it protection of let's say about a month or so. Let's go into the

September series and you want to buy a certain amount of spider put

options so that it equals to 861 negative Delta. You know let's say we

wanted to buy the 190 put so the spiders are at 195. So let's

we wanted to buy the 190 put and you can see if you buy 10 contracts of the

Spyder puts. You would get 255 Delta so perhaps we want to buy about 32 maybe so

that we get 861, so you know you want to check that and see how

you get it 843. I think the right amount would be about 34 spider put

contracts of the 190 put option that gives you negative 869 Delta's just from

the spiders. If you look at your position you have 861 positive deltas

and this will give you in 869 negative Delta, so you'll be negative by about 6

or 7 Delta's which is perfect. So now how much would this cost? this would cost

about let's say with the option is going for 1.4 so $1400, so about $4,500. If you

spend $4,500 on the spider put options, you can completely hedge your entire

portfolio, so obviously your entire portfolio is probably worth a lot more

you can see it's worth about $27,000. So spending $4,500 to protect this overall

portfolio is not bad and it doesn't mean that whatever you spend on the

spiders is going to go away. It's not going to go down to 0 first of all, if

the markets crashed like you fear that it might then, these put options

are actually going to be profitable and not only that if over a period of the

next few days say 5 to 7 days, if the risks in the market go away so in which

case, you don't need these options any longer then you can perhaps even

sell them maybe for even for a small profit. If the spiders have gone down a

little bit you know these put options might increase in value even if it does

not increase in value and it goes down a little bit, it has served the purpose of

hedging your overall portfolio. So you can always beta wait

your entire portfolio to anything, if you have NASDAQ stocks

which is most of these stocks on NASDAQ. So perhaps you want to beta weighted to

the Nasdaq ETF and now you can see you need actually 16 24 deltas,

when you beta weighted to the Nasdaq. You want to

take a look at your portfolio and decide which index it is that you would need to

beta weight your portfolio on and because that's critical. In fact, in

this case you would not come to the spider you would come to the QQQ . Because

all of the stocks are NASDAQ stocks, except for FedEx. All the others

are NASDAQ stocks. So you would want to come and actually have a beta weight

your portfolio, hedge it with the QQQ, so here you can see actually you're

going to be spending less contracts. I mean you'll need about less contract so

let's put 25 and there we go we have 837 negative actually may not

that's not true, you would need 1600 in this case. If you see 1624 and this

gives you 16 74 gives you a little bit more, so perhaps you can just do about 45

contract,s let's see that's too less. So maybe about 47 contracts on the QQQ

or maybe 48 and this would approximately hedge your portfolio on the Q's. Because

most of these stocks are NASDAQ stocks, so you would want to hedge it against the

Q's. So again you would spend around the same amount , you would spend

about forty five hundred, forty six hundred on this and of course, you can

close out this hedge at any time. But the important thing is when you want to

know how many Q's you have to buy, how many contracts of the Q's you have to

buy, you have to beta wait it to the Q's and that will give you the exact deltas,

that you on the queues to completely hedge this

portfolio. So if you take off the beta waiting you'll see you have only a raw

Delta of 594, but then just having the raw Delta doesn't make any sense because

all of these stocks are going to move differently. So you want to reduce them

all to a common base and you do that by beta weighting it against the q's.

Hope this was helpful if you have any questions please send us an email at

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