Hedging your portfolio by shorting with CFDs

It’s a little more complicated than this as you need to maintain free funds in your CFD trading account. If not, you will get margin called and your positions will eventually close if your balance falls too low. How much free funds you want to hold is up to you.

But why bother hedging at all? If you’re investing and have a long-view timeline, just have a diversified portfolio and all will be well. It is cheaper and less stressful. CFDs are more-so for day-trading.

However, if 1 unit is £1000, then 10 units costs you £10,000. With 5:1 leverage you now have £50,000 purchasing power so can buy 50 units. Remember though you have to consider the price spread, nightly interest fees, and currency conversion fees (as well as needing to maintain a minimum balance to prevent being margin called.)

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I’d agree, it’s better to take a long-term view. I don’t see much point turning to expensive hedging strategies after the horse has bolted.

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Definitely. If you’re young enough that you can take a 10+ year view, there is really no need to complicate things with hedging. Your risk is reduced just by taking a long timeline. Further reduced by diversifying. For active traders though I understand hedging is useful.

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I tried to do that, but it didn’t turn out the best for me, at least not for my taste. In case of a reversal (which happened to me), you can very easily reach the margin call, ie you have to add funds. On the one hand, you should be happy because your stock value is growing, on the other, you are losing significant money on CFD, plus you have to pay interest. The options aren’t free either, but I think you can better time them and limit the loss.

I don’t have any real experience of CFD’s myself tbh, I think I understand the concepts but I’m not going near them any time soon! They are really an instrument for active & experienced traders.

You have built your pot over several years and now trying to protect it which is very understandable but there are other appropriate methods available - options/futures brokers etc. CFD’s are a specific type of “insurance” if I may use that term but there are always risks & daily costs whilst running them as the guys have said above and imo they need persistent monitoring. In answer to your question though you would need 2 units to cover £10K @ 5:1 leverage.

Another thought might be to use Trading212’s CFD “practice” option - setup all your parameters for the index and track & monitor the results over a period of time - see what happens, I did when initially setting up my T212 a/c and was glad I had not used real cash!

Regards,

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I’d think hedging that would make most sense is rather to always hold some SPY puts, and use the extra liquidity on a downturn to buy stuff on discount.

CFDs could achieve the same thing, but certainly not on T212. Fees here are prohibitive, and a CFD position here only makes sense for very short lived positions.

Cheapest CFDs around will be IB, but then I’d choose puts over CFDs.

Edit: from an other post some time ago, I had looked at different provider’s fees

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If I calculated correctly, shorting SPX 500 will cost you $1.376761 per day (11 pm), per unit. SPX 500 is trading at $4485.76, so it’s 0.03069% per unit per day, less than 10% per year.

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Bigly this. I used trade CFDs a lot when I was working my previous job whereby I was working from home and didn’t have much to do. I then changed jobs and immediately had to stop trading CFDs as they really did require my constant attention.

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Indeed, when it comes to SPX 500 (and probably some other indexes), fees are substantially lower.
The calculations in my post were from an other thread and related to stocks CFDs, which all long positions had a 0.1% daily fee.

That being said, while it is indeed less than 10% per year to short SPX 500, this is still 10% of the entirely leveraged position, with a 1:20 leverage; hence about 200% of the cash position.
Also, 10% a year is still a decent amount of change, about what you could expect as return for a long SPY. These are still extremely high fees!

edit: 11.2% yearly. Nightly fees also occur on weekend, and are charged 365 days a year! 224% of the cash position for indexes, 182.5% for stocks.

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Margin would certainly be cheaper, but t212 does not provide margin loans.

For example, LCID short position overnight interest $0.006922, share price $27.53, 0.02514% per day per share, x365 = 9.18% yearly.

As I mentioned earlier, cheapest around here for more complex strategies will be IBKR.
Both CFDs and Margin position will cost you 1.6% per annum.

CFDs on T212 are just not suitable for long term hedging :person_shrugging:

When you say long term, what do you mean? Surely it’s fine to hedge for a couple of days or weeks, wouldn’t it? I do have some hedges on and agree that the interest is eating on my margins…

Well, when trading CFDs, the most common advice is to never keep a position overnight. On Plus500, I would sometimes keep a position up to a week, after that fees would start to affect the profitability way too much.

The thing is, even for a couple of days, it seems and may feel “minor”, but this is still a very expensive product for every night that you keep it; doesn’t matter how long you have your position open, but rather how many days / year you have any position open (and by days, I mean nights, when the fees kick in). And if you open/close a lot of positions, then the spread fees (commission fees of 0.5% - 3% per position) also matters heavily.

If this is something that is important in your strategy, I can only advice to look for cheaper alternatives; they exist!

For an occasional and short-lived situation, then high fees can be justified by the convenience of the platform.

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Plus500 :face_vomiting:
(20 chars)

I think T212 CFDs are great for hedging and selling short stocks that are struggling a lot. Extended hours are also appreciated. The only thing I’d request is to pay as little daily swap commissions as possible so we can sell short for swing or long-term short-selling strategies.

Was in 2011, so I’m allowed :crazy_face:

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Would you be able to provide the same interest fee comparison for going short on an index instead of a stock, maybe SPY/SPX? I’m assuming this info is easily retrievable for you hence I’ve asked for the favour.

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  • eToro, Short SPY (5x) about ~15% per annum (of the cash position, 3% of the leveraged position)
  • T212, Short SPX (20x) about 11.2% per annum of the leveraged position (224% of the cash position)
  • Plus500, Short SPY (5x), about 13.3% per annum of the leveraged position (66% of the cash position)

Hard to compare on different leverage multipliers, but in the case of eToro, where you can adjust the ratio, it is a linear scaling. Hence, if eToro were to offer 20x, it would scale to 60%/y cash = 3%/y full position. Which we can compare to T212, 224%/11.2% at the same ratio.

We can also compare eToro/Plus500 at the 5x ratio, as we can see Plus500 is a bit more than 4 times more expensive.

A bit too lazy to delve into the details of Interactive Brokers, but their CFD fees is 1.5% (above benchmark, currently at 0%) for all CFDs position; maybe up to 2.5% for smaller account. I believe 2.5% of the fully leveraged position, and I have no clue what ratio they offer.

Ranking would be

  1. IBKR
  2. eToro
  3. Plus500
  4. T212

Cheers!

Edit: these comparisons were made as requested on SPY or equivalent short. I know at least in the case of Plus500, their available leverage and fees may depends on the underlying security; T212 as well has different pricing for long/short of stocks/indexes/futures/currencies. Not sure about eToro :thinking:

Edit2: I hadn’t bothered checking, but eToro does offer SPX500, with a 20x leverage. Indeed the fee scaling holds up, beside minor rounding.

Plus500 offers an equivalent based on e-mini future of the S&P500, for a 20x as well, with quite lower fees; slightly less than 5% of the full position, or 98.6% of the cash position.

Ranking stays the same, even though Plus500 fees are significantly lower on a index product.

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Maybe this is just me, but I try not to hold CFDs for more than a day or two max. Shorter if possible. As another commenter pointed out, CFDs become very expensive very fast. They completely eat your profit. Personally I don’t use CFDs as a hedge, I just use them for a bit of fun when I have free time.

When we start talking about holding CFDs for weeks, I don’t think you get much benefit in terms of hedging. Just hold your diversified stock portfolio for a few months/years, and this is a good enough hedge. Your hedge here is time and diversification.

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Thank you for taking the time to draw this comparison, highly appreciated :slight_smile:

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