Long / Short ETF Hedging - A Worked Example

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Market Makers Hate This One Weird Trick

by Alex King, CEO, Cestrian Capital Research, Inc

We are often asked how the long/short index or sector hedged trading method works. There are many ways to do this, but I wanted to share a real example from yesterday and today.

If you can get good at this method, you can make money from markets that are good or bad, up or down, and even sideways (because sideways always sees some movement, just within a tighter range than normal).

Hedging and re-investing profits is a very effective method of compounding ie. it is a way of generating surplus money from the market that you can use as a supply of capital to re-invest in the market. It is less intuitive than say re-investing dividends but it is to all intents and purposes the same thing. Dividends are ‘free money’ handed to you by the issuer of the securities you own; if you re-invest that free money back into a security, it means you have added to your capital account without having to come up with any new capital. Re-investing profits from hedges is the same thing. The market moved against the direction of your core holding; you sold the hedge, realized the gain and re-invested the gain back into your core holding at a lower price than when you purchase the hedge. Rinse and repeat as often as you can, and there you have a perpetual money machine.

Of course this is easy to say and hard to do, and anyone who trades this way will tell you how difficult it can be. The trick is to never be emotional and never wait for a losing hedge to improve. In a bull market, profits from a short hedge are ephemeral and should be cashed when they are available.

Anyway, here’s a winning example from the last two days for me. As follows:

Starting position:

• Long TQQQ, long UPRO, long SOXL

After the close yesterday I thought the selling would intensify and in particular I thought the QQQ would try to hit the 200-day moving average during today, some way below its price at that point yesterday. So I opened three hedges on a 1:1 basis with their opposite numbers:

• Long SQQQ, long SPXU, long SOXS.

A little after the intraday lows today I sold all three of those positions to realize gains - modest % gains but a meaningful potential allocation of newly-created capital (“free money”!) as each of these were sizable allocations themselves.

I took the gains realized from those three and used the gains - only the gains, not the total capital harvested - to buy additional allocations of SOXL. Why SOXL alone? Because it was the strongest of the three long positions and the one I thought could move up most quickly. At the time of writing, that SOXL addition is up some 4.5%, from a blended entry point of $20.58 to a current price of $21.53.

Since the SOXL, TQQQ and UPRO positions were hedged from yesterday, the combination of selling the hedges a little after the lows were in, and re-investing those gains in the fastest-climbing of the three, has (thus far!) delivered a solid gain on these positions during today.

If you choose this method you have to re-assess when to apply a hedge constantly. Before the close today? Leave the positions long and unhedged into the events of this evening? Etc. It’s not easy, but this is a method which can be learned and rehearsed and in time it becomes muscle memory - including how to correct for mistakes when they happen (in short - either quit out of the losing hedge, or double down on the winning side).

We teach this method all day long in our Inner Circle service and it includes real-time trade disclosure alerts whenever Cestrian staff personal accounts place trades in covered ETFs and stocks.

Join us if you’d like to learn and refine this method for yourself.

Cestrian Capital Research, Inc - 4 March 2025.