Looking to the Futures

Today, I would like to discuss two different methods that can be utilized to hedge a large cap stock portfolio and provide context to the information necessary to place a proper hedge.  

For the purposes of this discussion, let’s assume we are looking to hedge a $500,000 portfolio of large cap stocks using Index products that track the S&P 500. The E-mini S&P 500 or ES futures contract and $SPX options are two common products used to hedge a portfolio of large cap stocks.  

We will also discuss the importance of beta weighting your portfolio. Beta is a measurement of volatility of an individual stock in comparison to the market. The level of the beta indicates the degree of correlation between a security and a market benchmark, in this example the S&P 500. A beta greater than 1 means the stock is more volatile than the overall market, while a beta less than 1 indicates that the security is more stable than the market. To find your portfolio’s beta you will need to multiply the percentage of the stock in your portfolio by its Beta, then add up the results of each position. Think or Swim allows you to Beta Weight your portfolio under the Analyze tab. 

Another concept you will need to understand when hedging a portfolio is Delta. Delta measures an option's price expected rate of change compared to a $1 change in the price of the underlying security or index. For example, a Delta of 0.40 means that the option's price will theoretically move $0.40 for every $1 move in the price of the underlying stock or index. 

In order to hedge a portfolio using the E-mini S&P 500 futures contract a client will need to first have a margin account that has been approved to trade futures. For the purposes of this discussion we will assume a $500,000 portfolio of large cap stocks which has a beta of 1. At the time this article was written, the E Mini S&P 500 June 2025 (/ESH26) was trading at 6900 which computed to a notional value of $345,000 (6900*$50). In order to calculate the number of contracts needed to place the hedge we will need to divide the total portfolio value by the notional value of one /ESH26 contract. 

$500,000/$345,000= 1.45 /ESH26 futures contracts 

Two /ESH26 contracts would over hedge a 500,000 portfolio of large cap stocks, providing $690,000 of notional value and effectively taking a bearish position. In order to adjust the hedge protection, a trader could use Micro E Mini S&P 500 contracts, which have 10% of the notional value of the E Mini contract at $5 per point. One /MESH26 contract has a notional value of $34,500 based on current prices. If a trader wanted to more accurately hedge their portfolio they could take a short position in 1 /ESH26 contract and 5 /MESH26 contracts to provide a hedge with a notional value of $517,500 (50*6900+(5*6900)*5).

 The current initial margin requirement for an /ESH26 contract is $24,000.  The current initial margin requirement for an /MESH26 contract is $2,399.99.  So the total cash requirement to implement this of a $500,000 portfolio of large cap stocks utilizing E Mini S&P 500 and Micro E Mini S&P 500 futures contracts would be $35,999.95.

Another strategy I would like to discuss is a hedge using options on the S&P 500 index, ticker symbol $SPX. Using options as a hedge strategy brings in the added element of time. We will also have to factor in Delta to the equation to create a complete hedge on a $500,000 portfolio of large cap stocks. For the purposes of this discussion, I will use an at-the-money option roughly three months from expiration. The SPXW 04/17/2026 6900 P was trading at $205.00 per contract at the time this was written with a Delta of .50. Factoring the $690,000 underlying value of the contract and the .50 delta, the hedge value of SPXW 04/17/2026 6900 P is $345,000 per contract.  

$500,000/345,000= 1.45 SPXW 04/17/2026 6900.00 P 

Two SPXW 04/17/2026 6900.00 P contracts would over hedge a $500,000 portfolio and would cost $41,000 at the time this was written. When using Index options to hedge it is very important to factor in strike and expiration selection to meet the tailored needs of your portfolio. We can see that this strategy has a slightly higher cash outlay compared to a futures hedge, with reoccurring costs if you need to push the hedge out to a later expiration. Futures initial requirements are used as cash placeholders and option premiums operate as a sunk cost that requires premiums to be paid each time a hedge strategy is implemented.  

As you can see through these examples, futures can provide hedging opportunities but may not always be the best option for your trading needs. The added leverage with lower cash outlays can allow you to protect a $500,000 portfolio with an initial margin requirement of around 7.2% of the underlying value. However, this strategy does not go without risk. If the market rises you may need to deposit additional funds in your futures account in order to meet a margin call. A poorly timed hedge can result in missed opportunities and can produce losses. As volatility increases, Initial margin requirements and options premiums can increase. 

Utilizing the CME’s micro contract traders can use futures to hedge portfolios of nearly any size. When trading index based options a trader is forced to select the correct time frame as well as the correct strike price. Other benefits of hedging through futures contracts include longer trading times, with futures trading 23-hour trading days. Charles Schwab Co. Inc representatives are not tax professionals, but it is important to note that Futures contracts and $SPX option contracts are taxed as a 1256 contract, with 60% taxed as long term gains and 40% taxed as short term gains.  

We have covered two ways to hedge your portfolio, ultimately it is up to each individual trader to explore different opportunities and find the most suitable strategy for their trading objectives.  

20-Day SMA:          6,955.34

50-Day SMA:          6,891.48

200-Day SMA:        6,480.71

14-Day RSI:             42.20%

Implied Volatility    13.57%

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