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Inverse Picks to Mitigate Portfolio

I currently have 15 non-inverse stocks in my portfolio. Anticipating large dramatic downside of the market, I am trying to determine how many shares of SQQQ (or possibly another inverse pick), I need to buy to mitigate my existing stocks. I am trying to essentially stay even with my portfolio. I was looking at price, ATR, and number of shares to try to determine how much SQQQ I should buy. Is there a calculation to best determine how much SQQQ I should buy to accomplish this ?


  • markdmarkd mod
    edited June 2022
    I am not a financial professional and I am not qualified to give financial advice of any kind. Also, I don't use inverse funds or know anything about how or whether to use them for the purposes you want, so these are just thoughts to consider, not advice whether or not to do it. So I'm just guessing:

    If you assume that SQQQ moves in direct proportion - that is dollar for dollar - to your portfolio, I think you would want to have a dollar value in SQQQ equal to the total dollar value of your portfolio. So, 10K in stocks loses 10% = $1000, would be 10K in SQQQ, 10% gain = $1000.

    If you assume that SQQQ moves less than your portfolio, say it gains only 80% of what your portfolio loses, you would want to buy about 20% more of of it - so, 10K in portfolio, about 12.5K in SQQQ. (10K portfolio loses 10%, loss = $1000; 12.5 K in SQQQ gains 8% = $1000)

    note: 12.5K = $1000/.08 so, the method is: divide the expected dollar loss in the portfolio by the expected per cent gain in SQQQ to get the dollar value in SQQQ needed to offset the dollar value loss in the portfolio

    If you assume SQQQ moves more than your portfolio, you would want to buy less of it. Say the portfolio loses 8% = $800, while SQQQ gains 10%, 8K x 1.1 = 800, so you would want about 8K of SQQQ.

    You might also want to consider put options (the right to sell your stocks at the put strike regardless where it is trading today), which I think allow you purchase protection for less - but for a limited time, so you might have to do it more than once.

    Maybe also consider whether it would pay in the long run to sell now (given your view of the market), take the loss (which is deductible, over several years if necessary) or pay the tax, and use the cash to buy back at what could be a hefty discount, so that when (if) the stocks come back, you might come out ahead. But there are a lot of assumptions to make and math to do to see if that might be true.
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