Hedging is a widely acceptable strategy applied in various types of trading. Hedging occurs when you open a position in the opposite direction to an existing position you have open, in order to partially protect your initial trade in the event it should end out of the money. Hedging is a feature available on the Daweda exchange and because you are negotiating contracts directly with other traders, you can negotiate hedging positions at any time and according to your own risk appetite and strategy.
An example of hedging:
Let’s say your chosen asset is oil and you decide to buy 10 Call contracts at the level of 45.56 (point A), as you predict that the oil price will be higher than 46.18 at the expiry time. But what if you change your mind or think that oil might not reach 46.18 at the time of expiry? Since you already have open positions, you can protect your trade by hedging against it. In order to hedge your position, you then buy a desired number of Put contracts to off-set any potential loss.
In summary, your one position will end in the money and the other will end out of the money, thereby countering or reducing losses.
Opening a Hedging Position
Click on the “Hedge” button next to your trade, and here you can choose the level you would like to place on your counter-trade; i.e. The platform buys you a PUT option at the price you choose. Once it is matched with another trader, you are hedged. In this example, you have hedged yourself at 46.18.
Once matched, your trade is protected! You cannot lose any of your investments if you hedged the same amount at your initial investment amount. In some scenarios, you may want to hedge a different number of contracts in order to reduce your risk, but still allow some potential for profit.
These are your 3 potential outcomes:
With $200 invested in total on both trades, Oil expires above 46.18; you win the Call trade and lose the Put trade. Your payout will be +$100 on the Call trade and -$100 on the Put trade, which means your net will be $0.
With $200 invested in total on both trades, Oil expires below 45.56; you lose the Call trade and win the Put trade. Your payout will be +$100 on the Put trade, and -$100 on the Call trade, which means your net will be $0.
With $200 invested in total on both trades, Oil expires between 45.56 and 46.18; you win the Call trade and win the Put trade and your payout will be $400.