Hedge Ratios for Futures and ETFs in commodities and indexes.

 

Background and Summary

The recent volatility in the metals markets has stirred up a lot of questions on how to mange risk and hedge postions.  I curated data from the various exchanges and put it together in one place for you.

Many of the exchanges will give you a margin break for a complete hedge, but don’t count on it when you are trading positions.  You must always use  proper money management and position sizing for your specific account size.

You may also be unable to trade one or more of the futures contracts at your broker; do some homework before placing any trades.

We will cover some basic leverage and contract specifications, then some example calculations.

 

Using just options for insurance

A trader can hedge using long term puts on a long GLD or SLV position, the amount you pay would be considered an insurance premium on the amount invested.  This type of hedge makes sense if the trader is investing a large dollar amount into a long term swing on GLD or SLV, or any other traded product.

For instance, if one purchased 100 shares of GLD @ 134.78 today, May 20th 2013, the cost to insure those 100 shares at the money until June 2014 would be roughly $10 per share or $1000.  A 7.4% annual premium to ensure/insure[l] that a trader is protected if Gold prices were to continue to lower.  Since GLD has dropped 30 points in 5 months or 18%, it may be something worth consideration.

There are also other ways to limit risks instead of outright puts, a put spread would reduce the volatility premium and time decay in the options. A trader could also buy puts on the ETF and sell puts on the futures to take advantage of premium and volatility decay.

If you are interested in learning more about ways to reduce risk in your portfolio, contact us for 1 on 1 mentoring.

 

Contract Pricing & Leverage

GLD

SPDR Gold Shares are designed to track the price of 1/10 of an ounce of gold.

/GC

A COMEX gold future contract represents 100 troy ounces. Price is U.S. Dollars and Cents per troy ounce.

One option contract equals one futures contract.

/YG 

A NYSE Liffe mini-Gold contract represents 33.2 troy ounces. Price is U.S. Dollars and Cents per troy ounce.

/MGC 

A Micro COMEX Gold contract represents 10 troy ounces. Price is U.S Dollars and Cents per troy ounce.

SLV

The SLV Trust holds silver bullion and is designed to provide investors with a simple and cost-effective method to gain exposure to the price of silver. SLV shares are designed to reflect the price of 1 ounce silver.  Price us U.S. Dollars and Cents per troy ounce.

/SI

A COMEX silver future contract represents 5,000 troy ounces. Price is U.S. Dollars and Cents per troy ounce.

One option contract equals one futures contract.

/YI

A NYSE Liffe silver futures is 1,000 troy ounces. Price is U.S. Dollars and Cents per troy ounce.

 

COMEX  also has mini-Gold and mini-Silver, but liquidity can be an issue, so I will not cover them.  Additionally  both /GC and /SI have options available that trade during the same times as the futures, liquidity and spreads can be wide.  1 /GC option represents 1 /GC contract, and 1 /SI option represents 1 /SI futures contract.

 

How to calculate ratios between ETF shares and futures

 

GLD

If  1 GLD share is priced to track 1/10 of an ounce of gold, then 10 shares of GLD equals 1 ounce of gold.  Since there are 100 ounces in one /GC future contract, then to hedge a /GC future contract position you would need 1000 shares of GLD.

Reverse:  If you are holding 1000 shares of GLD you need 1 /GC contract to hedge that position.

For /YG (1/3 size Gold Futures), since its 33.2 versus 100 oz  then for every 332 shares of GLD, one /YG to hedge that postion.

For /MGC (1/10 Micro-gold futures), 10 /MGC will hedge 1 /GC or 10 GLD shares.

Therefore each /GC contract is equivalent to,

  • 1000 GLD shares
  • 3 /YG contracts
  • 10 /MGC contracts

 

GLD Options

1 GLD option represents 100 shares of GLD, which is 10 ounces of gold.

 

Therefore,

  • 1 option contract per 100 shares of GLD
  • 3 option contracts per /YG future (approximately)
  • 10 option contracts per /GC future

 SLV

SLV is represents 1 ounce of silver,  /YI represents 1000 ounces of silver and /SI represents 5000 ounces of silver.

Therefore,

  • One /YI contract per 1,000 shares of SLV
  • One /SI contract per  5,000 shares of SLV

 

SLV Options

1 SLV option represents 100 shares of SLV, SLV is priced per ounce.

Therefore,

  • 1 option contract per 100 shares of SLV
  • 10 option contracts per 1 contract of /YI
  • 50 option contracts per 1 contract of /SI

 

 

SOURCE: http://www.cmegroup.com/trading/metals/

 

Spreads and Margin Rates offered by NYSE Liffe

Gold : Silver Spreads 

Symbol Ratio Margin
Mini (33.2 oz.) Gold Futures versus Mini (1,000 oz.) Silver Futures
YG:YI 3:5 70%

Inter-Exchange Spreads

Symbol Ratio Margin
Mini (33.2 oz.) Gold Futures versus COMEX Gold
YG:GC 3:1 85%
Mini (33.2 oz.) Gold Futures versus Options on SPDR Gold Shares
YG:GLD 1:3 70%
Mini (1,000 oz.) Silver Futures versus COMEX Silver
YI:SI 5:1 85%
Mini (1,000 oz.) Silver Futures versus Options on PowerShares DB Silver Fund
YI:DBS 1:6 70%
Mini (1,000 oz.) Silver Futures versus Options on iShares Silver Trust
YI:SLV 1:10 70%