Bring peace to your trading by locking profits and restricting losses via ‘Hedging’
To hedge a position in cash (participating F&O stocks) & futures market, use options (Buy Put for Long Futures & Bought Stocks, Call for Short future)
Let’s talk about ‘Hedging’ today. Financial dictionary adaptation of Hedge is ‘an investment to reduce the risk of adverse price movements in an asset’.
In simple words, additional positions that create compensatory positive cash flows when the original position starts bleeding.
A simple example is life insurance, a hedge against death. But more than what is a hedge, the most important thing to understand is ‘How to & When to Hedge’.
A Hedge always comes at a cost which is irrecoverable
hedge can prevent future damage but cannot undo past damage
Now once that is clear, let us understand when to hedge? There are three scenarios where hedging becomes crucial, which has to do with dealing with past, present and future risks.
Let us say one already has a position in the equity market (cash, futures or options). The position starts incurring losses. Now many of us (including me at times) would not be willing to exit at our pre-defined level.
When it comes to taking that bit of extra more risk beyond calculation, create a hedge.
Now here, why not many of us resort to hedging is because of the very first characteristic, it comes at an irrecoverable cost. Even so, have a big heart and create a trade with a hedge alongside to safeguard the future. The benefit is very simple our maximum loss is defined hence, just track profits, do not track losses.
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