Offsetting Transaction

AAA

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.



RELATED TERMS
  1. Evening Up

    A slang phrase used to describe an investor who closes a position ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Positive Carry

    A strategy of holding two offsetting positions, one of which ...
  4. Offset

    1. To liquidate a futures position by entering an equivalent, ...
  5. Over-Hedging

    A hedged position in which the offsetting position is for a greater ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
Related Articles
  1. Trading Strategies

    Enhance Your Portfolio With Active Equity

    This strategy provides the potential for larger returns while using less capital.
  2. Options & Futures

    Introduction To Single Stock Futures

    These contracts allow for easier shorting, and provide more leverage and flexibility than stocks.
  3. Investing Basics

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
  4. Options & Futures

    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.
  5. Retirement

    Hedge Your Bets With Inflation-Linked Bonds

    ILBs such as TIPS and I-Bonds allow investors to curb the corrosive effects of inflation and increase portfolio diversification.
  6. Options & Futures

    Offset Risk Without Investing Abroad

    With a little know-how, you can keep risk from topling your portfolio of domestic equities.
  7. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  8. Options & Futures

    A Detailed Look Into China's Options Market

    As the Chinese options market gradually takes shape, we provide an overview, including details of the initial phase and building blocks, primary beneficiaries, the impact on the overall financial ...
  9. Options & Futures

    How do you trade put options on E*TRADE?

    Learn all about put option trading at E*TRADE. Explore margin accounts and become familiar with the different types of option writing.
  10. Trading Systems & Software

    How do you trade put options on Ameritrade?

    Learn about option trading with TD Ameritrade. Explore the different types of options and their possible impacts on the investors that write them.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center