Hedging a Portfolio with Futures

Selling index futures can protect a stock portfolio from a market decline without selling the stocks. Here is how to size a hedge using beta, what a hedge does in a real downturn and what it costs.

Why hedge with futures

An investor with a large stock portfolio may want to reduce market risk for a while, perhaps before an election or while waiting to make a decision, without selling stocks and triggering taxes. Selling index futures creates a short position that gains when the market falls, offsetting losses in the portfolio.

Unlock all of Investing School

The rest of this lesson, its chart examples and quiz are part of Investing School. Start free with Stock Market Fundamentals and the first lesson in every category.