Hedging: Relaxed into the Summer

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  Serge Nussbaumer
  Chefredaktor

Pop music pays homage to summer in countless different ways. Classics such as “Summer in the City” and “Like Ice in the Sunshine” celebrate the benefits of the hot season. With their more recent hits “Cruel Summer” and “Summertime Sadness”, Taylor Swift and Lana del Rey sing about the finite nature of the long, warm days and the associated emotional fluctuations.
This year, however, it could be anything but easy for investors to listen to the music and forget the hustle and bustle of the stock market on the beach, on a city trip or in the mountains. After all, anything is possible in the coming weeks and months. Both quiet and uneventful vacation trading and strong turbulence are conceivable.

Possible déjà vu

The events of the past year have shown how quickly violent summer storms can hit the stock market. At the beginning of August 2024, the markets plummeted. The leading US index, the S&P 500, fell by up to 7.3% on the first three trading days of the summer month. Suddenly emerging concerns about weak global growth did not just weigh on Wall Street. Share prices also came under pressure in Europe and Asia. The thunder was particularly loud in Tokyo. The Nikkei 225 lost around 12% on August 5, 2024 alone, recording the second-worst one-day loss in its history. This sell-off was accompanied by a marked appreciation of the Japanese yen. The unwinding of so-called carry trades is likely to have played a role here.

At the start of the hot season of 2025, it is not so much such speculative financing transactions that dominate events on the currency markets as a reeling US dollar. Donald Trump is putting pressure on the greenback with constant tariff threats and decrees as well as persistent and fierce criticism of the central bank. In particular, the president’s attacks on Fed Chairman Jerome Powell have raised doubts about the independence of monetary policy and the solidity of the highly indebted US state. So far, the monetary authorities have remained unimpressed: contrary to Trump’s demands, the US Federal Reserve has not touched interest rates in recent months.

Calm Wall Street

While further developments in this matter remain open, trade policy is heading towards a “deadline”. The 90-day period for which Donald Trump suspended the reciprocal tariffs imposed at the beginning of April ends on July 9. If negotiations with major trading partners such as the EU – in the spat with China, the grace period runs until August 12 – do not bear fruit by then, the stock markets could be in for new trouble. The next reporting season will also begin in mid-July. This will show how well companies are coping with the tariff turbulence. Wall Street is banking on positive news: The S&P 500 has just reached a new all-time high. With a V-shaped recovery, the leading index more than made up for the losses incurred during the escalation of the trade dispute in the spring.

“The markets seem to have forgotten everything the Trump administration has threatened,” says Xavier Baraton, Global Chief Investment Officer at HSBC Asset Management. In his view, however, the unpredictability of the US president remains a major risk. “Our position is that the markets will not receive the positive confirmation they are already pricing in over the next three months,” the experienced stock market professional explains to Reuters. He therefore considers portfolio hedging to be appropriate. Specifically, Baraton buys put options on shares.

A common tool

A put gains value as soon as share prices fall. By including such an option in their portfolio, investors can limit the damage if equity positions come under pressure. This hedging strategy is also possible with the help of structured products, preferably put warrants. A practical example: the put warrant with ISIN DE000SY7PCB6 on the S&P 500 Index expires on September 19. The product traded by Société Générale on Swiss DOTS is therefore suitable for short-term hedging of a portfolio with US large caps.

Simple calculation example

The issuer has fixed the strike exactly at the 6,000-point mark. The S&P 500 is currently well above this threshold, which is why the put is out of the money. However, if Wall Street were to turn downwards, the warrant would convert the losses into profits with a high leverage of more than 50. Assuming the position to be hedged is worth USD 50,000. With a subscription ratio of 100:1 and an index level of 6,175 points, a rounded number of 810 warrants are required (calculation: [50,000 / 6,175] * 100). At an ask price of CHF 0.897, the acquisition costs for the “own brand” insurance – excluding expenses – amount to just under CHF 727.

The protection takes effect as soon as the S&P 500 is below the strike on the warrant’s expiry date. Let’s assume that Wall Street is in for a “cruel summer” and the leading index crashes to the 5,000 mark – as it did last April. In this case, the put would roughly offset the losses on the US equity exposure by around 60%. If, on the other hand, the rally continues or the S&P 500 at least remains stable through the summer, the hedging position would expire worthless. Investors would have to book this loss as an insurance premium or as the price of a quiet vacation with lots of music.