Why worry about the Hedge Ratio?

Exchange traded derivatives are about a 600 trillion USD market out of which approximately 46% is in stock index options and futures, substantially greater than exchange traded vanilla equity volumes.

Derivative trading directly affects the benchmark indexes so everyone with an interest in markets should be concerned about the Hedge Ratio.

Please see about for a more technical definition but pragmatically above the zone you get futures selling and below it futures buying.

We grade exponentially the amount of which to expect (Y = minimal, R = significant, DR = potentially pivotal and B = dangerous).

Of course in each benchmark we place an exact level where to expect this and in doing so leave ourselves nowhere to hide as the proof will be there, or not, for all to see when the market hits that particular level.

How does it work?

How can it help me?

There are so many different aspects of trading, or just market involvement, it is impossible to be specific, but anyone interested in markets, for whatever reason, should want to know about the biggest influence on them.

In its simplest form, knowing in advance where a big futures seller will be (Nb. when the market is above the zone) could be a benefit, to a scalper, or anyone interested in avoiding paying the high of the day, if only to tighten stops, or just as a measure of the strength of the markets commitment, to name but a few.

On 20th March 2020 we published a forward-looking ratio table for the start of the April expiry on the 23rd.

 The closing price for the SPX on that Friday was 2304.92.

The pertinent ratios that we published were DR at 2345 and B1 at 2195.

The market on Monday opened at 2290.71, gapping down below DR, making B1 the next level of support.

As you can see from the table opposite what the SPX did that day.

Worth noting that the open, and market low, the next day was 2344.44.

We can’t say why knowing the ratio will help you, because we don’t know what you do, but all we can say, is if you want to be aware of the biggest influence on benchmarks, then this should be of interest.

July 10th, 2017 by Richard