Options & derivatives

Hedging

Hedging means taking a position to protect against the risk of another position.

It is insurance: for example, a shareholder buys puts to cushion a possible drop. Hedging reduces risk, but it has a cost that eats into potential gains. It is a trade-off between safety and return.

Example

You hold stocks and buy puts: if the market falls, the puts offset part of the loss.

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