DATE: September 17, 2012
Can you explain what it means to hedge an option position?
According to Cboe’s Online Dictionary hedging is a conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position. For example, if you have a long market position such as owning call options, a hedging action would be adding a new position with short market exposure such as selling some call options or buying some put options. The primary purpose of a hedging trade is to offset some of the potential losses of an existing position. To learn more about what it means to hedge an option position, view this week's segment of "Ask the Institute."