how hedging is useful manully. means what is the strategy use.

[Amit Kumar]

how hedging is useful manully. means what is the strategy use.

[Keith Watford]

Hedging is supposed to reduce risk and the normal way is to take a position on a derivative, ie a different instrument, such as an option.

Most people consider that they are hedging by taking the exact opposite position, of course, this offers no advantage.

Would these people go into a casino and play roulette by betting on both red and black?

I would hope not, because it should be obvious that it is impossible to win that way. All the times that black or red come up, all that happens is that you get your money back.

When 0 or 00 come up, you get nothing back.

0 and/or 00 is equivalent to the broker's spread.

Say that you wanted to buy shares in a pharmaceutical company that is quoted on the S&P500.

Now, you know that, at times the S&P500 may tumble and this affects the price of companies that are performing well, not just the poorly performing.

This doesn't really make sense, but it happens.

So you may decide to limit your risk by buying the shares in the pharmaceutical company and also either shorting the S&P500 or shorting the pharmaceutical sector.

As long as the company out-performs its peers and/or the index, you will make a profit, but will be protected from losses if the index falls dramatically.