Options & Derivatives
Hedging
A hedge is like insurance for a portfolio. By taking a position that gains when the main holding loses, an investor can limit downside, usually at the cost of some potential upside or a premium paid.
Common hedges include buying put options to protect stock holdings, using futures to lock in prices, or holding safe-haven assets that rise when risk assets fall. The goal is protection, not profit.
Hedging is about managing risk rather than eliminating it. Overhedging can drag on returns, so investors weigh the cost of protection against the risk they are trying to guard against.
Example
An investor worried about a market drop might hedge by buying put options that gain value if stocks fall.
Related terms
Hedging — FAQ
What is Hedging?
Hedging is the practice of taking an offsetting position to reduce the risk of adverse price movements in an investment or portfolio.
Can you give an example of Hedging?
An investor worried about a market drop might hedge by buying put options that gain value if stocks fall.
Understanding creates conviction.
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