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.