What types of hedging are there? If someone had asked this question a few years ago, the answer would have been much simpler: "Hedging is hedging, what's there to hedge?"
But over the last few years the term has basically added several aspects. Let's keep the nomenclature the same as for other asset classes so that it is easy to understand.
This definition, along with its key benefits, will help us understand, depending on the state of the market trend and our own profile, which one suits us best and when.
As https://newexness.com/exness-download/ says, there are two key types of hedging - passive and active. While passive hedging aims to eliminate risk, active hedging has the dual objective of reducing risk and at the same time making some profit.
Now for investors and all future traders, simple passive hedging makes sense. It is a simple strategy where one enters into a compensating position in an area of pain. The simplest example of the same is that in a normal market, an investor or would-be buyer simply goes ahead and buys with the money invested and holds the position until the contract expires or is realized.
1. Buy Futures and buy 2 puts (a little further): in an overheated rally one wants to participate, but very late in the day one advocates active hedging, because the future trader not only hedges the risk (by limiting the loss). to Put strike - Premium), but also provides for additional profit in case of a pullback.
2. Another type of active hedge is a dynamic synthetic call. Here the trader buys a futures and buys a put. This synthetic call becomes dynamic when the futures buy remains as is, and as soon as the futures buy price rises, taking a tiny loss on the bought put, the person exits and moves to the higher strike of the put. This locks in a profit at the higher level. Similarly, put strings can be revised downwards if the pullback turns into an uptrend.
It is clear from the definition that passive or classic hedging methods will always be very useful. Thus, for all investors and many position traders, this could be the ultimate solution. Similarly, in a fairly unidirectional market where there is a trend but a large margin of safety is expected, passive hedging works (as needed).
However, the situation just mentioned and the type of passive market activity may not prevail in many cases. Consequently, it makes sense to resort to active hedging, especially when the underlying asset has made a directional move or is in a rollover mode, as a classic hedging mechanism may prove costly. Hedging set up for the purpose of making a profit as well as protecting against risk may prove to be more economical.
Thus, once the domain of experienced traders, both active and passive hedging should prevail in every trader's risk management artillery, to be used when it is most appropriate.
