1. Can I use option hedging for commodities and currencies, too?

Yes. Options hedging isn't limited to equities. It is extensively used in commodities, like gold, crude oil, and currencies, such as USD/INR, to protect the market participants from price movements.

2. What are the risks of hedging with options?

While options help reduce risk, they also carry certain drawbacks like premium costs, time decay, incomplete hedge, and liquidity risk. Hence, hedging must be strategic and not emotional, used when potential loss outweighs the premium cost.

3. Does hedging eliminate all trading risk?

No - hedging reduces the risk, but never gets rid of it entirely. Hedging reduces losses and volatility, but it cannot assure gains. Options can reduce downside losses but also carry premium costs and have limited duration. The purpose of hedging is to reduce risk, not to eliminate the risk.

4. What is the difference between a Protective Put and a Covered Call?

A protective put protects against downside risk because traders have the right to sell their position at a predetermined price if it falls. A covered call, on the other hand, involves the selling of call options on stocks they currently own to generate income in the form of option premiums, but it limits the potential upside.

5. Can I use options to hedge my entire portfolio?

Yes, you can hedge your entire portfolio using options, but it requires careful calculation. Many investors hedge diversified portfolios with index options, like Nifty options or Bank Nifty options. For example, if your portfolio represents the Nifty 50, buying Nifty put options protects your portfolio from overall market declines. However, this is strictly for experienced investors and traders.

Best Options Hedging Strategies

Home

Option Trading

Best Options Hedging Strategies

Option Trading

Best Options Hedging Strategies

Option Hedging stratergies are tools which can help you protect against an unusual price fall, To simply put into word option hedging is to take a position opposite to the current position to create a coushion for your Investment.