How to hedge our portfolio during uncertainty

People holding portfolios or individual shares always strive to hedge their positions against a market crash. This does not mean, we can reduce the risk to 0, but it is possible to reduce the losses to a more acceptable volume. A perfect hedge strategy does not exist. Some strategies will work well in one market and will not work on another.

In this article, we will present some portfolio or individual portfolio hedging opportunities, through an ETF based on the VIX index. VIX is designed to measure volatility expectations and has a backward correlation with the SP500. Reverse correlation makes VIX an excellent opportunity for hedge of portfolios and shares. The problem is that VIX is not traded.

To overcome this problem, you can trade with VIX options. This solution is good in the short term, but it is too costly for an ordinary trader.

This leads us to the next possible solution, and this is VXX - short-term futures of the iPath SP500 VIX, which hold a long position in one short-term and one long-term VIX futures. VXX ETN needs to continually update its portfolio to include new VIX futures. This in itself leads to VXX impairment over time, as longer-term futures are more expensive than short-term.

Otherwise, the VIX chart will move horizontally and the VXX will drop. You can see this difference for the last five years on the chart below.

The point is to position ourselves in the market with long positions when the volatility is expected to increase and the likelihood of market retracement to rise. In the coming days, we expect important economic and political news that will shake markets and raise fear and hence the value of VXX. After the tranquility of the markets, we can also take a rebounding reverse position with SL over the last high.

Looking back, the average upward movement of VXX is 22% during elections, market corrections or military conflicts.

On the main chart, we can see how different political events affect on VXX and how to trade the market uncertainty.

Varchev Finance offers VXX trading via the Varchev Absolute Trader platform

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