Hedging for volatility (27Apr2023)
What is hedging? Fidelity defines the following hedging: Hedging is an advanced risk management strategy that involves buying or selling an investment to potentially help reduce the risk of loss of an existing position. Investopedia has the following definition: Hedging techniques generally involve the use of financial instruments known as derivatives . Two of the most common derivatives are options and futures. With derivatives, you can develop trading strategies where a loss in one investment is offset by a gain in a derivative. Magolorean states the following as common hedging strategies: There are three common hedging strategies: diversification, options trading, and futures contracts . Each strategy has its own advantages and disadvantages depending on your individual needs and goals as an investor (Below are some suggestions about hedging when I asked ChatGPT.) Diversification : One of the simplest and most effective ways to hedge a portfolio is through diversif...