Hedging with futures

Hedging with futures means taking a futures position opposite to an exposure held elsewhere, such as a stock portfolio, a crop or a fuel budget, so that losses on one side are offset by gains on the other. A short hedge protects a holder against falling prices, a long hedge protects a future buyer against rising prices, and what remains is basis risk.

Senzoukria · Glossary · Updated September 2026

Definition

The CFTC glossary describes hedging as entering positions in a futures or other derivatives market opposite to positions held in the cash market to minimize the risk of financial loss. The hedger gives up part of the upside in exchange for reducing the downside.

  • Short hedge: sell futures against something you own or will produce.
  • Long hedge: buy futures against something you will need to buy.

Sizing a hedge

Worked example: a portfolio worth $500,000 that moves like the S&P 500 (beta 1). ES at 5,000.00 has a notional value of 5,000 × $50 = $250,000, so the hedge is 500,000 / 250,000 = 2 ES contracts short. With MES, notional 5,000 × $5 = $25,000, it is 20 contracts, which allows finer adjustment. A portfolio with a beta of 1.2 would need 2 × 1.2 = 2.4 ES, in practice 2 ES and 4 MES.

What a hedge leaves behind

  • Basis risk: the futures price and the hedged asset do not move identically.
  • Roll risk: long-dated hedges must be rolled, at whatever the calendar spread is.
  • Cash flow: daily mark-to-market can require cash on the futures side before the offsetting gain on the other side is realised.

Hedgers in the order flow

Hedging flow is driven by exposures rather than short-term views, so it can be large and relatively insensitive to intraday price. In the Commitments of Traders report, participants hedging a physical business appear as commercials in the legacy report. On an intraday footprint nothing identifies a hedger: a large sell is a large sell, whatever its reason.

In Senzoukria

The application has no hedge calculator. The contract specifications it uses (multiplier, tick size and tick value per root) give the numbers needed for notional sizing, for example $50 per point on ES and $5 on MES.

Common mistakes

  • Sizing by number of contracts instead of notional value.
  • Ignoring beta or the mismatch between the hedged asset and the index.
  • Reading every large trade as a hedge or every hedge as bearish.

In the same section

Sources

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Frequently asked questions

Is a hedge a bet against my portfolio?
It is an offsetting position: if the portfolio falls, the short futures gain, and if it rises, they lose. The combined position has less market exposure, not a directional bet.
Why use micro contracts to hedge?
Their smaller multipliers let the hedge match the exposure more closely. One MES is a tenth of an ES, so a 2.4-contract ES requirement can be met as 2 ES plus 4 MES.

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