How To Hedge With Options
Options
Hedging With Commodity Options
Typically the underlying of an options contract will be a futures contract for the commodity, rather than the physical asset. As options can be settled in cash instead of physical delivery, they are a popular means of hedging against commodity risk.
Hedging With Options Summed Up
- Hedging with options involves opening an options position – or multiple positions – that will offset any risk to an existing trade
- If one position declines in value, the other position (or positions) would hopefully turn a profit – balancing each other out or even creating a net profit
- Hedging strategies can’t entirely remove all your risk, but they can help to limit your risk to a known amount
- Your decision about when to hedge using options will largely be based on how much the premium of the trade is.
- Long puts tend to be more popular means of hedging as your risk is limited.
- You can use options to hedge shares, forex, indices and commodities
