TRADING GLOSSARY

Hedging: protecting your portfolio from adverse moves

Hedging is the practice of taking an offsetting position to reduce your exposure to an adverse price movement. Think of it as insurance for your portfolio: you pay a small cost to protect against a potentially large loss.

Common hedging strategies

Put options: Buying put options on stocks you own gives you the right to sell at a predetermined price. If the stock crashes, your put option increases in value, offsetting the stock loss. Inverse ETFs: ETFs that move in the opposite direction of an index. If you hold a stock portfolio and buy an inverse S&P 500 ETF, a market decline is partially offset. Correlation hedging: Going long on one asset and short on a correlated asset to profit from relative performance. Currency hedging: Using forex forwards or options to protect international investments from exchange rate risk.

The cost of hedging

Hedging is not free. Put options have a premium. Inverse ETFs have ongoing fees and decay. Short positions incur borrowing costs. If the market moves in your favor, the hedge reduces your profit. This is the trade-off: less downside risk in exchange for less upside potential.

When to hedge

Hedging makes sense before known risk events (earnings, elections, central bank meetings), when your portfolio is concentrated in one sector, during periods of elevated uncertainty, or when approaching profit targets you want to protect. AskTrade’s Risk Assessment Agent identifies when hedging may be appropriate for the positions it analyzes.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.