Hedging
Opening an offsetting position to reduce the net risk of an existing trade or portfolio against adverse price movements.
Hedging reduces exposure by taking a position that moves in the opposite direction to an existing holding. It does not eliminate risk — it transfers or reduces it, usually at a cost (spread, premium, or foregone upside).
Common hedging instruments include put options, inverse ETFs, short futures contracts, and correlated-asset positions. Traders hedge when they want to hold a long-term position through a period of expected short-term volatility without closing the original trade.
On the desk
Long 500 shares of SPY. As earnings season approaches, buy SPY put options to limit downside. If SPY falls 5%, the puts gain value and partially offset the loss on the stock.