Hedging

[heliumprime]

OK I am a novice trader. would like to learn about hedging especially in the Oil & Gas sector anyone out there that have any valuable advice please do respond.

Thank you

 

[foredog]

THis is how not to do it

http://www.trade2win.com/boards/trading-faq/57420-million-dollar-question.html

 

[Strangelydifferent]

Hi, I'm a novice too, I'm interested understanding whether hedging is appropriate for stocks. At the moment, I confess, I really don't get it. I am sure there is simply some error in my thinking so I'd be grateful if anyone could set me right.

So,
1. If you buy two "things" whose prices are expected to be inversely correlated then what you gain on one you lose on the other, zero sum game, except for transaction costs.
2. If the "things" are not 100% correlated then you are only really taking a punt on the difference.
3. If you decided to dispose of the loss making one after some movement has occurred then from that point onwards you may as well have just started with a naked long trade.

It seems to me to be the same whether one is an amateur trader or a big company trying to protect its business denominated in foreign currency.

I can see how things would be different if at least one of the "things" was an option, i.e. doesn't involve the same outlay until the market has moved. Is that "the whole point of hedging"?

Thanks
ta ta
Duncan

 

[everyonerich]

THis is how not to do it

http://www.trade2win.com/boards/trading-faq/57420-million-dollar-question.html

:innocent:

 

[Rhody Trader]

Hi, I'm a novice too, I'm interested understanding whether hedging is appropriate for stocks. At the moment, I confess, I really don't get it. I am sure there is simply some error in my thinking so I'd be grateful if anyone could set me right.

The basic idea of hedging is to partially or completely eliminate one or more risks inherent in a position. For example, a US importer who has a contract to buy widgets from Japan could hedge the currency exposure in the forex market, or a jewelry manufacturer could hedge their gold costs.

It seems as though many traders think hedging and spread or pair trading is the same thing. If you own stocks and short the index futures, that's a hedge against a general market decline. If you go long GOOG and short YHOO, that's not a hedge. That's a trade on the relative performance of the two stocks.

 

[raysor]

Hi, I'm a novice too, I'm interested understanding whether hedging is appropriate for stocks. At the moment, I confess, I really don't get it. I am sure there is simply some error in my thinking so I'd be grateful if anyone could set me right.

So,
1. If you buy two "things" whose prices are expected to be inversely correlated then what you gain on one you lose on the other, zero sum game, except for transaction costs.
2. If the "things" are not 100% correlated then you are only really taking a punt on the difference.
3. If you decided to dispose of the loss making one after some movement has occurred then from that point onwards you may as well have just started with a naked long trade.


It seems to me to be the same whether one is an amateur trader or a big company trying to protect its business denominated in foreign currency.

I can see how things would be different if at least one of the "things" was an option, i.e. doesn't involve the same outlay until the market has moved. Is that "the whole point of hedging"?

Thanks
ta ta
Duncan

Hedging is just trying to limit your loss in a worst case scenario. If you have a large open position that, if it all went wrong, you would seriously damage your wealth, then you must have a hedge (and an effective one in place). Otherwise if you have a position that is not too dangerous, you can gradually hedge as the position goes against you.
It is not something that should be done without any knowledge as the risk of your position may be constantly changing. The only thing I have done is written index options and hedged with the same index future. You must be able to calculate how the hedge will work under all circumstances. Even then it is not without risk.
The other point is that you don't hedge out all your risk, otherwise as you say you hedge out your profit as well.