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A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, [1] many types of over-the-counter and derivative products, and futures contracts.
Options offer income, hedging and ways to speculate based on market views. Dozens of different options trading strategies exist and can be tailored to fit a variety of investor needs and viewpoints.
A very straightforward strategy might simply be the buying or selling of a single option; however, option strategies often refer to a combination of simultaneous buying and or selling of options. Options strategies allow traders to profit from movements in the underlying assets based on market sentiment (i.e., bullish, bearish or neutral).
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A related term, delta hedging, is the process of setting or keeping a portfolio as close to delta-neutral as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re ...
In addition to standard investment options like stocks, bonds and ETFs, HNWIs often incorporate precious metals, hedging strategies, alternative investments, real estate and commodities into their ...
Market neutral strategies can be seen as the limiting case of equity long/short, in which the long and short portfolios of the fund are balanced with great care so that a very high degree of hedging is achieved. Some advantages of market neutral strategies include being able to generate positive returns in a down market, and generating returns ...
The objective is to minimize risk due to the movement of the underlier's price, while implementing whatever strategy led to the sale of the options in the first place. For instance, a seller of a call may hedge by buying just enough of the underlier to create a delta neutral portfolio.