What does 'Offset' mean

An offset involves assuming an opposite position in regards to the original opening position. Additionally, to offset is to liquidate a futures position by entering an equivalent but opposite transaction that eliminates the delivery obligation. The goal of offsetting is to reduce an investor's net position in an investment to zero so that no further gains or losses are experienced from that position.

BREAKING DOWN 'Offset'

Offsetting can be used in a variety of transactions in to remove or limit liabilities. In accounting, an entry can be offset by an equal but opposite entry that nullifies the original entry. In banking, the right to offset provides financial institutions with the ability to cease debtor assets in the case of delinquency or the ability to request a garnishment to recoup funds owed. For investors involved in a futures contract, an offsetting position eliminates the need to receive a physical delivery of the underlying asset or commodity by selling the associated goods to another party.

Businesses may choose to offset losses in one business area by reallocating the gains from another. This allows the profitability of one activity to support the other activity. If a business is successful in the smartphone market and decides it wants to produce a tablet as a new product line, gains experienced through the smartphone sales may help offset any losses associated with expanding into a new arena.

In 2016, BlackBerry Ltd. experienced significant losses in its mobility solutions and service access fees. The associated declines were offset by gains in the areas of software and other service offerings, lessening the overall impact to BlackBerry's bottom line.

Offsetting in Futures Contracts

Investors offset futures contracts and other investment positions to remove themselves from any associated liabilities. Almost all futures positions are offset before the terms of the futures contract are realized. Even though most positions are offset near the delivery term, the benefits of the futures contract as a hedging mechanism are still realized.

The purpose of offsetting a futures contract on a commodity, for most investors, is to avoid having to physically receive the goods associated with the contract. A futures contract is an agreement to purchase a particular commodity at a specific price on a future date. If a contract is held until the agreed-upon date, the investor could become responsible for accepting the physical delivery of the commodity in question.

Example of Offsetting Positions

If the initial investment was a purchase, a sale is made to neutralize the position; to offset an initial sale, a purchase is made to neutralize the position.

With futures related to stocks, investors may use hedging to assume an opposing position to manage the risk associated with the futures contract. For example, if you wanted to offset a long position in a stock, you could short sell an identical number of shares.

RELATED TERMS
  1. Physical Delivery

    Term in an options or futures contract which requires the actual ...
  2. Closing Offset (CO) Order

    A limit order that allows the purchase or sale of a security ...
  3. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  4. Futures

    A financial contract obligating the buyer to purchase an asset ...
  5. Pairoff

    1. A purchase of securities to offset a previously transacted ...
  6. Offsetting Transaction

    In trading, an activity that exactly cancels the risks and benefits ...
Related Articles
  1. Managing Wealth

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
  2. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  3. Taxes

    How The Straddle Rule Creates Tax Opportunities For Options Traders

    This rule allows traders to substantially reduce their risk, and possibly benefit on their tax returns as well.
  4. Investing

    Introduction To Currency Futures

    The forex market is not the only way for investors and traders to participate in foreign exchange.
  5. Investing

    Trading Gold And Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  6. Investing

    Crude Oil Prices: Comparing Future Price Vs. Current Market Price

    Discover the differences between oil futures market prices and oil spot market prices and what leads to the differences between the two.
  7. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  8. Investing

    What's The Difference Between Options And Futures?

    An option gives the buyer the right, but not the obligation, to buy or sell a certain asset at a set price during the life of the contract. A futures contract gives the buyer the obligation to ...
  9. Investing

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
RELATED FAQS
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  2. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Answer >>
  3. How can a futures trader exit a position prior to expiration?

    A futures contract is an agreement to buy or sell a commodity at a pre-determined price and quantity at a future date in ... Read Answer >>
  4. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  5. How do I learn technical skills for trading commodities?

    Learn what resources are available to learn about trading commodities, and understand some of the differences between stocks ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center