Many investors will use options to manage risk or to establish more complex positions than simply directionally trading options by buying or selling puts and calls. In this chapter, we will review option hedging strategies as well as how and why to establish multiple option positions.

Using Options as a Hedge

Many investors will use options to hedge a position that they have established in the underlying stock. Options can be used to guard against a loss or to protect a profit the investor has in a position. Options in this case will operate like an insurance policy for the investor.

Improve your chances of passing the Series 9 exam


Related Articles
  1. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  2. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  3. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  4. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  5. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  6. Trading

    A Newbie's Guide to Reading an Options Chain

    Learning to understand the language of options chains will help you become a more effective options trader.
  7. Managing Wealth

    Practical And Affordable Hedging Strategies

    Hedging offers a cost-effective way to transfer risk.
Frequently Asked Questions
  1. What is the value of one pip and why are they different between currency pairs?

    Pips relate to the smallest price moves of foreign exchange rates. This differs from currency pairs such as EUR/USD, which ...
  2. Earnings per share (EPS) versus diluted EPS

    Does EPS worth more than Diluted EPS? Learn about EPS and diluted EPS, how they are calculated, and the difference between ...
  3. How the Republican and Democratic approaches to regulating the economy

    Here is an overview of the Democratic and Republican approaches to economic issues. Learn about the role in government in ...
  4. The Difference Between an Operating Expense and Capital Expense

    Learn more about the differences between an operating expense (OPEX) and a capital expense (CAPEX), and see how they are ...
Trading Center