Hedging when the Taiwan stock market is closed for a holiday
Taiwan's stock and futures markets close on the same holidays, so a hedge has to be in place before the break. Size it with beta, test it on the real session calendar, and count the costs and the stock-specific gap it cannot cover.
By Soren Huang · Published · updated · Editorial policy
Contents
- How can you hedge when the Taiwan stock market is closed?
- Why does a holiday closure leave stock positions exposed?
- Which instruments can you hedge with, and when do they trade?
- How many futures contracts do you need?
- How do you test a hedge rule in a backtest?
- What does a hedge cost?
- Why doesn't the hedge match your holdings exactly?
- Frequently asked questions
How can you hedge when the Taiwan stock market is closed?
Put the hedge on before the market closes. Taiwan's stock and futures exchanges close on the same holidays, so nothing listed in Taiwan trades during the break. Sell TAIEX futures or buy TAIEX puts on the last trading day, sized to your portfolio's beta, and hold them until reopening. Both legs then take the same reopening gap.
A hedge is a second position that gains when your main position loses, so that part of the loss cancels out. For a stock portfolio before a holiday (台股休市避險), the usual hedge is a short position in index futures or a long position in index put options.
Why does a holiday closure leave stock positions exposed?
A closure stops trading, but it does not stop the news, so everything that happens during the break arrives in one price jump at reopening. A gap is the difference between the last price before a closure and the first price after it.
On a normal weekday, about 19 and a half hours pass between the stock market close at 13:30 and the next open at 09:00. A weekend adds two more days. Around Lunar New Year, Taiwan's markets often stay shut for a week or more of calendar days, while markets in the United States and Europe keep trading. Company news, central bank decisions and overseas sell-offs pile up, and the Taiwan market prices all of them at once on the first morning back.
A stop-loss order does not protect you from a gap. If your stop sits 3% below the last close and the market reopens 5% lower, the stop fills near the reopening price, not at your stop level. A hedge that is already open moves with the gap instead of reacting to it.
Which instruments can you hedge with, and when do they trade?
Taiwan-listed index futures and options follow a Taiwan stock portfolio most closely but close on Taiwan's holidays; overseas instruments keep trading during the break but follow Taiwan stocks less closely. The table lists the main choices. Times are Taipei time.
| Instrument | Hours (Taipei time) | Value per index point | Trades during a Taiwan holiday? |
|---|---|---|---|
| TAIEX Futures (TX), TAIFEX | Regular session 08:45–13:45; after-hours session 15:00–05:00 next day | NT$200; minimum tick 1 point | No |
| Mini-TAIEX Futures (MTX), TAIFEX | Same as TX | NT$50; minimum tick 1 point | No |
| Micro TAIEX Futures (TMF), TAIFEX | Same as TX | NT$10; minimum tick 1 point | No |
| TAIEX Options (TXO), TAIFEX | Same as TX | NT$50 per point of premium | No |
| US-listed Taiwan stocks and funds (for example the TSMC ADR) | US regular session: 21:30–04:00 in US summer time, 22:30–05:00 in US winter time | Priced per share in US dollars | Yes, unless the US market is also closed |
| CME equity index futures (E-mini S&P 500, E-mini Nasdaq-100 and their micros) | Sunday to Friday, nearly 23 hours a day, with a one-hour daily break at 17:00–18:00 US Eastern time | E-mini S&P 500: US$12.50 per 0.25-point tick; E-mini Nasdaq-100: US$5.00 per tick | Yes, unless the US market is also closed |
An after-hours session is the evening trading period on TAIFEX, running from 15:00 to 05:00 the next morning. On normal days it lets you adjust a hedge after the day session ends, for example after US economic data at night (台指期夜盤避險). Around long holidays, TAIFEX publishes which after-hours sessions run; check that announcement for each break instead of assuming the last evening trades. TAIFEX also counts each after-hours session as part of the next trading day, which matters when you build bars; see night sessions in futures backtests.
TAIEX puts are the second Taiwan-listed choice. A put option is a contract that gains value when the index falls below a chosen level (the strike), so buying puts caps your loss below that level while you keep the gain if the market rises. You pay for this with the option premium. Option sellers know the break is coming, so the premium on the last trading day already pays for the extra days of risk.
Overseas instruments are a partial hedge for the days when Taiwan is shut. US markets do not close for Lunar New Year, so a short position in US index futures or a Taiwan-related US-listed stock can offset part of a global sell-off during the break. They are priced in US dollars and follow Taiwan stocks only loosely, which the last section covers.
How many futures contracts do you need?
Size the hedge by your portfolio's market exposure, not by its cash value. Beta is a number that says how much your portfolio tends to move when the index moves by 1%: a beta of 1.2 means it has tended to move about 1.2% for each 1% index move.
Contracts = (portfolio value × beta) ÷ (futures price × value per point)
Here, portfolio value is the market value of your stocks in NT dollars, beta is the portfolio's beta against the TAIEX, futures price is the current futures quote in index points, and value per point is NT$200 for TX, NT$50 for Mini-TAIEX or NT$10 for Micro TAIEX. Round to whole contracts. The smaller contracts let you round closer to the exact figure.
Hypothetical example
A portfolio is worth NT$10,000,000 with a beta of 1.2. Mini-TAIEX futures trade at 20,000 points, so one contract controls 20,000 × NT$50 = NT$1,000,000. The hedge is (10,000,000 × 1.2) ÷ 1,000,000 = 12 Mini-TAIEX contracts, or 3 TX contracts. Over the holiday the futures reopen 1,000 points lower (−5%). The 12 short contracts gain 12 × 1,000 × NT$50 = NT$600,000. Beta predicted a 6% portfolio loss (NT$600,000), but two holdings had bad news of their own and the portfolio fell 7% (NT$700,000). Costs for the round trip come to about NT$4,000. The hedged result is about −NT$104,000 instead of −NT$700,000. If the market had reopened 5% higher instead, the futures would have lost NT$600,000 and taken most of the portfolio's gain with them.
How do you test a hedge rule in a backtest?
Test the hedge on the real exchange calendar, so every closure in your data appears as one jump between the last bar before it and the first bar after it. A holiday-gap backtest (休市期貨避險) only means something if the closures in the data match the closures that actually happened.
- Use bars that follow the exchange calendar. There should be no bars on holidays and no filled-in bars across them. Typhoon closures are unscheduled; check that your data treats them as non-trading days too. Market holidays in backtests covers gaps and calendar changes in detail.
- Mark each closure. Count the calendar days between the last bar of one trading day and the first bar of the next. Anything longer than a normal weekend is a holiday closure for this test.
- Decide day-only or full-session bars. With full-session bars, check how your data groups the after-hours session, since TAIFEX assigns it to the next trading day. The TAIEX futures backtest checklist lists the session settings to confirm first.
- Write the rule with exact times. For example: sell the hedge before the last regular-session bar ends on the day before a closure, and buy it back after the stock market has opened on the reopening day. TAIEX futures open at 08:45, 15 minutes before stocks at 09:00, so decide which of the two prices you compare.
- Add costs to every trade, with wider slippage on the reopening trade, because the first minutes after a gap are the least orderly.
- Record each closure separately: the portfolio's gap, the hedge result, the costs and the difference left over.
In AlphaPrime (Valynox), GPU backtesting runs futures rules on your own historical bar data, including TAIEX futures, with the trading sessions, fees and slippage you set and next-bar execution. The futures leg of a hedge rule is a futures strategy, so you can test it there and read each holiday trade in the trades view of the Performance Report. The stock leg comes from your own portfolio records, matched closure by closure.
Expect a small sample. Lunar New Year comes once a year, so ten years of data contain only about ten of those breaks. Judge the hedge by how it behaved in each one, especially the worst one, rather than by an average.
What does a hedge cost?
A holiday hedge costs commission, tax and slippage on two trades, plus basis and the cash held as margin. Each item is small on its own, but you pay all of them on every closure, including the quiet ones where the hedge was not needed.
| Cost | What it is | How to put it in a backtest |
|---|---|---|
| Commission | Broker and exchange fees per contract, on entry and exit | Your actual rate, charged on both sides |
| Futures transaction tax | Taiwan taxes index futures at 0.002% of contract value per side, and options at 0.1% of the premium | A percentage of contract value or premium on each trade |
| Slippage | The gap between the price you expect and the price you get | More ticks on the reopening trade than on the entry |
| Basis | The difference between the futures price and the index; your hedge result follows the futures, not the index | Use futures prices, not index prices, for the hedge leg |
| Option premium | The price paid for puts, which shrinks as time passes | The full premium paid, minus what is left at exit |
| Margin | Cash held by the broker against the futures position | Not a trading cost, but keep enough spare cash to cover a move against the hedge |
Pick a contract month that does not settle during the break, so the hedge does not expire while you still need it. For the general method of putting costs into a test, see trading costs in backtests.
Why doesn't the hedge match your holdings exactly?
An index hedge removes only the part of a gap that follows the index; anything specific to your own stocks stays with you. This is basis risk in the wider sense: the risk that the hedge and the holding move by different amounts.
- Stock-specific news. A company announcement during the break moves your stock, not the index. The more concentrated the portfolio, the larger this leftover part.
- Beta changes. Beta is measured on the past. Recompute it from recent data before each break, and expect it to drift.
- Overseas proxies add more differences. A US-dollar hedge adds currency movement. US index futures follow US stocks first and Taiwan stocks second. A US-listed share can trade at a premium or discount to its Taiwan listing.
- Timing. Your hedge exit and your portfolio's first price after reopening happen at different moments, and the market keeps moving in between.
- Upside is hedged too. A short futures hedge gives back gains when the market reopens higher. Puts keep the upside but cost premium every time.
What this means if you use AlphaPrime: treat the futures side of a holiday hedge as a strategy, test it on TAIEX futures bars with the real session calendar, next-bar execution and your actual costs, then compare each holiday trade with your portfolio's gap over the same break.
Frequently asked questions
Does the TAIEX futures night session trade during Lunar New Year?
No. TAIFEX closes on Taiwan market holidays, so neither the regular session nor the after-hours session runs during the break. TAIFEX publishes which after-hours sessions run on the days around each long holiday. Check that announcement before you plan to adjust a hedge on the last evening.
Can I hedge Taiwan stocks with US index futures during a Taiwan holiday?
Partly. US index futures trade while Taiwan is closed, so they can offset a global sell-off that happens during the break. They follow US stocks first and are priced in US dollars, so they leave more of the Taiwan move uncovered than TAIEX futures do.
Should I use TAIEX futures or TAIEX puts for a holiday hedge?
Short futures offset losses and gains almost one for one, cost little to trade, and need margin. Long puts cap the loss below the strike and keep the upside, but you pay the premium every time. Choose by whether you want to keep upside and how much you will pay for it per closure.
How do I backtest holiday gaps in TAIEX futures?
Use bars that follow the exchange calendar, with no bars on holidays or typhoon closures. Mark every break longer than a weekend, enter the hedge before the last bar of the day before it, and exit after reopening. Record the gap, the hedge result and the costs for each closure separately.
Does the TAIFEX after-hours session belong to the same day or the next day?
TAIFEX counts each after-hours session, which runs from 15:00 to 05:00 the next morning, as part of the next trading day. A Friday evening session therefore belongs to Monday. Check how your data groups these bars before you count daily results or closures.
What AlphaPrime does here
AlphaPrime's GPU backtesting tests futures rules on your own bar data, including TAIEX futures, with the trading sessions, fees, slippage and next-bar execution you set, so the futures leg of a holiday hedge is tested on the calendar you actually trade.