Syracuse Business Daily

Derivatives hedging strategy in stock market?

State the ways to hedge the futures contract and how to use the options contract effectively . The strategy of combining both futures and options contract.

Public Comments

1. It is not totally clear to me what you are asking. You started by asking about hedging in the stock market, then went to hedging futures contracts. Futures contracts do not trade on the stock market. I will interpret the question as "How do you use options to hedge stock or futures positions?" The primary risk in both stock and futures positions is what is option traders call "delta" risk, the loss when the price of the stock or future moves in the wrong direction. Long positions have a positive delta, while short positions have a negative delta. That risk can be hedged by taking an options position with the opposite delta. Deltas for options are positive for long calls negative for long puts negative for short calls positive for short puts So, if you have a long stock (or futures) position you have a positive delta. To hedge that risk you can take an options position with a negative delta by buying puts and/or writing (shorting) calls. Similarly, if you have a short stock (or futures) position you have a negative delta. To hedge that risk you can take an options position with a positive delta by buying calls and/or writing (shorting) puts.