Hedging Strategy
Hedging Trade
Hedging Strategy
Hedging Trade
Hedging is a risk management strategy. Hedging in finance refers to protecting investments. A hedge is an investment status, which aims at decreasing the possible losses suffered by an associated investment. Hedging is used by those investors investing in market-linked instruments. To hedge, you technically invest in two different instruments with adverse correlation. The best example of hedging is availing of car insurance to safeguard your car against damages arising due to an accident. Hedging prevent the investment from suffering losses.
Hedging Strategy
Long Straddle
A long straddle is a combination of buying a call and buying a put, both with the same strike price and expiration. Together, they produce a position that should profit if the stock makes a big move either up or down.
Short Straddle
A short straddle is an options strategy comprised of selling both a call option and a put option with the same strike price and expiration date. It is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts.
Long Strangles
Long strangles involve buying a call with a higher strike price and buying a put with a lower strike price. For example, buy a 105 Call and buy a 95 Put. Long straddles, however, involve buying a call and put with the same strike price.
Short Strangles
A short strangle consists of one short call with a higher strike price and one short put with a lower strike. Both options have the same underlying stock and the same expiration date, but they have different strike prices.
Call Ratio Spread
A call ratio spread involves buying one at-the-money (ATM) or out-of-the-money (OTM) call option, while also selling or writing two call options that are further OTM (higher strike). A put ratio spread is buying one ATM or OTM put option, while also writing two further options that are further OTM (lower strike).
Put Ratio Spread
A ratio spread involves buying a call or put option that is ATM or OTM, and then selling two (or more) of the same option further OTM. Buying and selling calls in this structure are referred to as a call ratio spread. Buying and selling puts in this structure are referred to as a put ratio spread.
Batman Strategy
The Batman Strategy combines a Call Ratio spread and a Put Ratio spread. It is a neutral strategy to be deployed if you think the market will be rangebound.
Long Iron Butterfly
A long iron butterfly spread is a four-part strategy consisting of a bear put spread and a bull call spread in which the long put and long call have the same strike price. All options have the same expiration date, and the three strike prices are equidistant.
Short Iron Butterfly
A short iron butterfly spread is a four-part strategy consisting of a bull put spread and a bear call spread in which the short put and short call have the same strike price. All options have the same expiration date, and the three strike prices are equidistant.
Long Iron Condor
A long iron condor spread is a four-part strategy consisting of a bear put spread and a bull call spread in which the strike price of the long put is lower than the strike price of the long call. All options have the same expiration date.
Short Iron Condor
A short iron condor spread is a four-part strategy consisting of a bull put spread and a bear call spread in which the strike price of the short put is lower than the strike price of the short call. All options have the same expiration date.
Call Calendar Spread
A call calendar spread is purchased when an investor believes the stock price will be neutral or slightly bearish short-term. The position would then benefit from an increase in price after the short-term contract expires and before the longer-dated contract is closed.
Put Calender
A put calendar is an options strategy selling a near-term put and buying a second put with a longer-dated expiration. A put calendar is best used when the short-term outlook is neutral or bullish, but the longer term outlook is bearish for the underlying asset.
Double Calender Spread
A diagonal spread is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.
Bullish Butterfly
Combining two short calls at a middle strike, and one long call each at a lower and upper strike creates a long call butterfly. The upper and lower strikes (wings) must both be equidistant from the middle strike (body), and all the options must have the same expiration date.
Put Butterfly Strategy
A put butterfly is a combination of a bear put debit spread and a bull put credit spread sold at the same strike price. The long put options are equidistant from the short put options. Entering a put butterfly will typically result in paying a small debit.
Hedging Strategy in Short
- Short Strangle
- Short Straddle
- Short Put
- Bullish Butterfly
- Bull Call Spread
- Batman
- Bullish Condor
- Call Ratio Spread
- Call Ratio Back Spread
- Call Calendar
- Bull Put Spread
- Jade Lizard
- Double Fly
- Double Condor
- Diagonal Calendar Spread
- Long Call
- Long Iron Condor
- Long Iron Fly
- Long Straddle
- Long Strangle
- Range Forward
- Put Ratio Spread
- Put Calendar
- Long Synthetic Future
- Short Iron Fly
- Short Iron Condor
- Reverse Jade Lizard
Advantage of Hedging
Following are the various advantages of Hedging:- Futures and options are very good short-term risk-minimizing strategy for long-term traders and investors.
- Hedging tools can also be used for locking the profit.
- Hedging enables traders to survive hard market periods.
- Successful hedging gives the trader protection against commodity price changes, inflation, currency exchange rate changes, interest rate changes, etc.
- Hedging can also save time as the long-term trader is not required to monitor/adjust his portfolio with daily market volatility.
- Hedging using options provide the trader an opportunity to practice complex options trading strategies to maximize his return.
- Hedging limits the losses to a great extent.
- Hedging increases liquidity as it facilitates investors to invest in various asset classes.
Types of Hedging Strategies
Hedging strategies are broadly classified as follows:
Forward Contract: It is a contract between two parties for buying or selling assets on a specified date, at a particular price. This covers contracts such as forwarding exchange contracts for commodities and currencies.
Futures Contract: This is a standard contract between two parties for buying or selling assets at an agreed price and quantity on a specified date. This covers various contracts such as a currency futures contract.
Money Markets: These are the markets where short-term buying, selling, lending, and borrowing happen with maturities of less than a year. This includes various contracts such as covered calls on equities, money market operations for interest, and currencies.