Hedging

Hedging is the practice of taking a position that offsets potential losses in another position. Think of it as insurance for your portfolio. You pay a premium (the cost of the hedge) in exchange for protection against adverse moves.

• Protective Puts — Buy put options on stocks you own. If the stock drops, the put gains value.
• Collar — Buy a protective put and sell a covered call to offset the cost. Limits both upside and downside.
• Diversification — Spreading investments across uncorrelated assets is the simplest form of hedging.
• Inverse ETFs — Funds that rise when the market falls (SH, SDS). Simple but have daily reset decay.
• Cost of hedging — Protection isn't free. Buying puts costs money, which reduces overall returns.