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Updated about 11 years ago on . Most recent reply

User Stats

75
Posts
30
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Scott L.
  • Investor
  • Stamford, CT
30
Votes |
75
Posts

Experience in hedging RE investment via futures or puts?

Scott L.
  • Investor
  • Stamford, CT
Posted

Has anyone on the forums had experience reducing the risk of a downturn in the home market, by buying a hedge on the stock/options market?

For example, you're building or refurbing a home that will be targeted for a sale close in 9 months. You believe in the project & your gen. contractor, but wan't to limit risk from a housing downturn at some point. So you could buy on the equity markets a 'put' (option to sell the investment at a net gain, if the market turns down) or a future (locked-in price for the home market index in your metro region) for 9 nine out to protect much of the downside, like insurance.

It looks straightforward enough to buy options "insurance" - some volatility like stocks but well within the realm of rational investing - not a gimmick. I'm researching the options/futures that are easiest to understand, most cost efficient to acquire and manage like standard stock investing, and will write something up. If you've found good 'instruments' for trading (like an option on a REIT or on the Schiller home index), please chime in. Also, if you'd like to collaborate on the research, do write me.

Thanks

Scott

Most Popular Reply

User Stats

158
Posts
49
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Paul Jamgotch
  • Investor
  • Grand Rapids, MI
49
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158
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Paul Jamgotch
  • Investor
  • Grand Rapids, MI
Replied

I think its an interesting topic. If you buy puts on a stock or ETF as a r/e hedge you are making the assumption that equities (more specifically the stock you own puts on) move in the same direction as the real estate market the home is in; This may or may not be the case. Also, one would have to buy so many puts to be hedged 1:1 that it could become cost prohibitive.

I think the best hedge would be buying low enough to withstand a 10-15% r/e market decline.

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