Hedge/Hedging

Hedging means taking a second position specifically to reduce the risk of a position you already hold, rather than to make money on its own. The goal isn't to profit from the hedge itself, but to limit how much you could lose if the original trade moves against you.

In practice, this usually means holding two positions that tend to move in opposite directions, so a loss on one is offset, fully or partly, by a gain on the other. A trader long 100 shares of a stock might buy a put option on that same stock: if the stock falls, the shares lose value but the put gains value, cushioning the blow. A trader might also hedge across related instruments, for example holding a stock position and shorting a correlated index or sector ETF (a fund that tracks a basket of stocks) to dampen exposure to broad market moves.

The nuance that trips people up is that hedging isn't free and isn't perfect. Options hedges cost premium (the price paid for the option), and offsetting positions can eat into gains just as much as they limit losses. A hedge also rarely cancels out risk completely — correlations between instruments can weaken exactly when you need them most, so the "protection" can be smaller than expected. Hedging is about shaping and reducing risk, not eliminating it.

It's also worth distinguishing hedging from simply closing a position. Closing a trade removes the exposure entirely; hedging keeps the original position open while adding something else to blunt its risk. That distinction matters for taxes, margin, and how a trader thinks about their overall exposure.