What is the hedging option used for?
The hedging option allows clients to trade on an instrument in both directions i.e. it facilitates the option to go long and short at the same time on the same instrument. This can be used for a number of reasons:
- Some clients may take the view that a losing position will eventually turn in their favour. For this reason, they do not want to close out that position but also do not want to run the risk of any further losses. Because of this they may decide to hedge their initial investment by opening a position in the opposite direction. This will serve to limit any further losses whilst maintaining the original open position. It will also negate any margin requirements attached to the position whilst leaving the position open.
- Alternatively, some clients may want to open a position on an instrument in opposite directions with the intention of maintaining the position that goes into profit and closing the losing trade.
