Offsetting Transaction

Definition of 'Offsetting Transaction'


In trading, an activity that exactly cancels the risks and benefits of another instrument in the portfolio. An offsetting transaction is used when it is not possible to simply close the original transaction as desired. This frequently occurs with options and other more complex financial instruments.

In this way, a trader does not have to agree to close the option contract with the party on the other side of the options trade, but can simply cancel the net affect by entering into an offsetting transaction.

Investopedia explains 'Offsetting Transaction'


The most basic example of an offsetting transaction occurs in options trading. Suppose you have sold a call option on 100 shares with a strike price of $35 and an expiration in three months. To close this transaction before three months is over, you can buy a call option with exactly the same features, thus exactly offsetting the exposure to the original call option.

Offsetting transactions typically do not factor in transactions costs.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  2. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.
  6. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer to government spending rather than business or individual spending. When referring to accrued federal government deficits, the term "national debt” is used.
Trading Center