Hi there!
Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility associated with the price of an asset by taking offsetting positions contrary to what the investor currently has. The main purpose of speculation, on the other hand, is to profit from betting on the direction in which an asset will be moving.
Speculative Strategies
An example of a speculative strategy would be how you are buying a call option, speculating that the price of the underlying stock would increase. This strategy is called the Long Call Strategy as below:
Some variation of this strategy is the Bull-Call Spread Strategy where the options trader thinks that the price of the underlying asset will go up moderately in the near term. Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying and the same expiration month. This is shown below:
Hedging Strategies
An example of a hedging strategy would be the protective put, which a put option is purchased against a long stock position. The goal of a protective put is to completely eliminate or reduce the downside loss potential of a long stock investment. This is illustrated below:
Hope that's helpful!
Hi there!
Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility associated with the price of an asset by taking offsetting positions contrary to what the investor currently has. The main purpose of speculation, on the other hand, is to profit from betting on the direction in which an asset will be moving.
Speculative Strategies
An example of a speculative strategy would be how you are buying a call option, speculating that the price of the underlying stock would increase. This strategy is called the Long Call Strategy as below:
Some variation of this strategy is the Bull-Call Spread Strategy where the options trader thinks that the price of the underlying asset will go up moderately in the near term. Bull call spreads can be implemented by buying an at-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying and the same expiration month. This is shown below:
Hedging Strategies
An example of a hedging strategy would be the protective put, which a put option is purchased against a long stock position. The goal of a protective put is to completely eliminate or reduce the downside loss potential of a long stock investment. This is illustrated below:
Hope that's helpful!