Hedge

A position taken to offset the risk of another — for example buying a put to protect shares you own.

A hedge is a position you take specifically to reduce the risk of another position, not to make money on its own. Think of it as insurance: you accept a small, known cost in exchange for protection against a large, uncertain loss. Most of the time you actually hope the hedge expires worthless, because that means your main position did well.

A common example is the protective put. Say you own 100 shares of a stock trading at 50. Buying a put with a 45 strike caps your downside at that level no matter how far the stock falls, and the premium you pay is the price of that safety. If the stock climbs, you lose only the premium and keep the upside.

The typical mistake is over-hedging or paying for protection you don't need. Puts cost premium and lose value to theta every day, so hedging a position you'd happily hold through a dip just quietly drains your returns. Match the hedge to a risk you genuinely want to remove, not to every wobble in the chart.

← Back to the glossary · Guides · Strategies

All options terms

Call Put Strike price Premium Expiration In the money (ITM)At the money (ATM)Out of the money (OTM)Intrinsic value Time value (extrinsic)Delta Gamma Theta Vega Implied volatility (IV)Open interest Assignment Exercise Spread Break-even Probability of profit (POP)Assignment risk / early assignment LEAPS Naked (uncovered) option Rho Historical volatility (HV)Volume Bid-ask spread Moneyness Covered call Cash-secured put Vertical spread Iron condor Straddle Strangle Rolling Margin Max pain American-style option European-style option Contract multiplier Debit vs credit Volatility skew The Greeks Underlying Leverage Expected move Notional value Protective put Collar Butterfly spread Iron butterfly Calendar spread Diagonal spread Credit spread Debit spread Bull call spread Bear put spread Ratio spread Synthetic position The wheel strategy Poor man’s covered call (PMCC)Box spread Put-call parity Pin risk IV crush IV rank / IV percentile Ex-dividend date Deep in the money Weeklys 0DTE (zero days to expiration)Order types (to open / to close)Buying power reduction Cash settlement Market maker Slippage Mid price Black-Scholes model

Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.