Hedging
Buying insurance against adverse price moves
Definition
Hedging is a risk management strategy that involves taking an offsetting position in a related asset to reduce the risk of adverse price movements in the primary position. A hedge reduces potential losses but also limits potential gains. Common hedges include buying put options on stock positions, using futures contracts to lock in commodity prices, or buying inverse ETFs. Iron condors traders often use VIX-based hedges to protect against volatility spikes.
Example
An investor holds 1,000 shares of SPY worth $450,000. Worried about a short-term market decline, they buy 10 SPY put options with a $440 strike for $500 each ($5,000 total). If SPY drops to $420, the puts gain value and offset most of the stock loss — the hedge cost $5,000 but saved much more.
Related Terms
Frequently Asked Question
What is hedging?
Hedging uses an offsetting position to reduce risk from adverse price moves. It limits losses but also caps gains. Options, futures, and inverse ETFs are common hedging tools.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.