Some thoughts about ETF hedging; feel free to leave comments!

Scenario 1:

An investor sells 1M ETF shares to a Market Maker(MM) at bid price. MM has a long position and will need to offload the shares bit by bit. How does MM hedge its position prior to the long position? My guess will be using option - MM has a positive delta and therefore needs a put option to bring down the +ve delta.

Scenario 2:

An investor wants to buy 1M ETF shares from MM. Is there any hedging strategy involved in this case? If so how?


One popular strategy and the one that works very well if it can be done is hedging using futures. This can be done on both sides.

  • $\begingroup$ Hi @Bob Thanks for the comment; but I am curious how the complete process flows; e.g. when MM sells ETFs what's their position? and why do they need to hedge in Scenario 2? $\endgroup$ – Leopardl Jul 21 '19 at 14:36
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    $\begingroup$ When the MM sells the ETF to the investor, the MM will lose money if the ETF increases so the MM will buy futures to hedge this. When the MM buys from the investor, the MM would sell futures. $\endgroup$ – Bob Jansen Jul 21 '19 at 14:46
  • $\begingroup$ Thanks, @Bob Selling futures you mean short selling? $\endgroup$ – Leopardl Jul 21 '19 at 14:57
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    $\begingroup$ Yes, short selling the futures. $\endgroup$ – Bob Jansen Jul 21 '19 at 15:04
  • $\begingroup$ Got it now makes perfect sense to me. Thanks a lot @Bob $\endgroup$ – Leopardl Jul 21 '19 at 15:04

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