Option Hedging

Option hedging involves using options contracts to protect a portfolio against adverse price movements in an underlying asset. By purchasing put options, an investor can lock in a minimum sale price for their holdings, effectively capping potential losses.

Alternatively, call options can be used to hedge short positions against rising prices. This strategy provides insurance-like protection while allowing the investor to retain exposure to the asset's potential gains.

Effective hedging requires understanding the Greeks, as the cost and effectiveness of the hedge change based on time, volatility, and price. It is a standard risk management tool for institutional and retail traders alike.