So what is Hedging exactly?

Discussion in 'Options' started by OddTrader, Mar 24, 2016.

  1. Pekelo

    Pekelo

    My point was, if the hedge is correctly done you lock in BOTH profits and losses. Or do you have a way when you can lock in losses and still keep growing gains? That is called a stop loss, not a hedge.
     
    #11     Mar 28, 2016
  2. I Know You

    I Know You

    It varies. I would only hedge a longer term cycle against a short term one, sometimes I would gain on both, others only gain on the hedge, others I lose on the hedge (basically gain less from a longer term cycle's position). They are all hedges, it doesn't always go according to plan, but that's the nature of trading.
     
    #12     Mar 28, 2016
  3. OptionGuru

    OptionGuru



    • A "hedge" has to be implemented when the trade is opened - such as a Credit Spread, Debit Spread, Covered Call, etc.
    • A "hedge" isn't an afterthought once the trade is in progress. You don't close the barn doors after the horses have bolted.


    :)
     
    #13     Mar 28, 2016
    CBC likes this.
  4. Pekelo

    Pekelo

    Let's just pick one...

    Limits profits, protects only up to a limit, not a good hedge, actually not a hedge at all.

    Again, the problem with true hedges that they limit profits too, so most of the time just getting out of position is better. (less commission too)
     
    #14     Mar 28, 2016
  5. ironchef

    ironchef

    Guru,

    How do I hedge a covered call when open to ensure the trade is profitable?

    Thanks.
     
    #15     Mar 28, 2016
  6. OptionGuru

    OptionGuru


    • The stock hedges the short calls to the upside.
    • The short calls hedges the stock to the downside. To a very limited extent.
    • A Covered Call is a "hedged" position. I didn't say it was a a good hedge.




    It's "hedged" from the open. Nothing you can do once the trade is opened.




    :)
     
    #16     Mar 28, 2016
  7. A simple debit spread is a risk-reversal and therefore unstable to spot, vol, skew, and passage of time. Maybe you can consider it hedged at the onset, but I would argue it would be perfectly reasonable to continue hedging once the trade is in progress.
     
    #17     Mar 29, 2016