Using CFD to hedge

Hi, I’m currently long in my Invest portfolio mostly with small cap growth stocks.

I’m looking to hedge my portfolio whenever certain indicators pop up by shorting IWM. Since we can’t short using the invest platform, I was thinking of using the CFD platform instead.

Just posting this here to get some feedback and identify flaws in this strategy? I know margins are preset and I will adjust the amounts after margin to match my invest portfolio value.

One option you may not have considered is buying inverse ETFs, something like XSPS.
You could hold this inside of your Invest account and it mimics the inverse of the S&P500 performance. IE: If the S&P500 is up 5%, the inverse one is down 5%.

The only flaw to holding a CFD position open, is time.
The longer you hold them open, technically the more you will lose byway of swap fees.

CFD positions have swap fees which are taken every day at 23:00 hours. These can be viewed in the “information tab” located to the right hand side of the trading window. Scroll down to where it says SWAP.

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I’ve tried using CFD’s to hedge my Tesla position. It didn’t really work out very well. Basically just lost out on potential gains. I’ve decided not to mess with CFDs as a hedge anymore.

What I would like is options, even though they will probably never come to T212. Selling call options as long as you have the capital requirements, basically can be like a limit buy order, but you get paid to place it. Obviously you can still end up losing money, but in the end, you own the share at the price you wanted if the option gets exercised by the other party.

Thanks man. I did consider the XSPS but 2 things are holding me back:

  1. Correlation of S&P500 and the stocks in my portfolio less than vs IWM
  2. For some reason I don’t really prefer UK domiciled ETF’s. The difference in timing vs the US based ETF means there’ll be odd moves

Understand the swap fees. Any way for us to reduce margins set out by T212 or is it fixed?

I would say please don’t go to CFD for investing. If you are a day or swing trader then CFD might have its use. It is a very risky and unnecessary strategy. If you are investing for the long term then swings in share prices are not that important. Just make sure you have a good investment strategy.

Interesting. Did you have any indicators for hedge on vs hedge off? For example, I’ll only be hedging when IWO <150EMA

I always thought of IWM as a leading indicator to the S&P, so even to offset against IWM directly, i think it could be argued that it could still be a viable hedge - possibly. I do not think there is a direct IWM inverse on the platform, but if you find one then you can request Trading212 to add it.

I don’t know too much in regards margin reqs on CFD, to be frank.
I know spreads on most instruments are floating, only a few indexs are fixed.

Margin reqs I believe just depend on available funds, you start with a retail account which is 1:30 margin normally. If you want 1:500, then you need to upgrade to a pro account. (Strongly advise against unless you have £500k or more capital).

Does this answer your query ? Not sure if I did :smiley:

No indicators, Tesla was around $900 at the time. I didn’t want to sell, but I thought there was alot of risk in that price. So hedged some of it with a short CFD position. And then Tesla just continued to go up…

Also the safest and better way to hedge is through diversifying your portfolio.

I see your point there, but I feel sometimes this just doesn’t work.
If VIX rises and your portfolio stays the same weight, albeit diversified, you have inherently taken more risk by proxy of the implied volatility going up. Ideally a 50/50 split of cyclical and defensive stocks could do ok, but sometimes the best option would be to reduce exposure overall and hedge a position to ride the storm of the VIX.

That said, i’m more in the boat you mentioned, as I don’t seem to do well with CFD, so when VIX goes up, I take note and scale my positions accordingly to watch out for bargains if they appear.
Others like a hedge, so they can buy insurance on their stocks or best case, profit both ways.

@adm thanks for all the feedback! Maybe need to do a bit more research to see if XSPS is a viable option for me. I just can’t seem to relate to its pricing due to it being on the LSE. Otherwise, I can test out the CFD way but with very small amounts first (partial hedge)

@TsotFin You have very fair points! But I’d argue that having a hedging strategy plays a role in an overall investing strategy. I’m not saying take on incredible amounts of margin just bcs of gut feeling, but a very systematic approach where if triggered I will short the amount of 50% of my long holdings.

It sounds like you are knowledgeable about what you are doing and I’m sure this strategy fits in with your risk tolerance levels. In that case then maybe it is worth considering. Word of caution though, I would take feelings out of the equation :grin:. Feelings and investing don’t make good bed fellows :upside_down_face:

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I tried to use CFDs to hedge a stock I own but the spread was so outrageously wide it basically did nothing and I gave up.

Out of curiosity, what stock was it? Maybe due to liquidity?

Scottish mortgage Trust