I’ve hard of “hedging” when someone wants to “lock in” a position’s profit, without selling the stock. I was told this is for tax reasons because if you hold the stock over a year you get taxed lower.
But doesn’t that require additional capital? Do I use options?
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Have you ever heard the phrase “hedge your bet”? Hedging is the process of protecting yourself from loss. Let’s say you just gained a ton of money because the price of a stock you have just doubled over night. However you know that stock is volatile and the price might halve overnight and you would lose everything you gained. You could sell and keep the money but if you don’t want to do that there are a series of strategies you can do to reduce your risk.
One of those strategies is called a “put option”. Basically you pay someone a fee to give you the option to always sell your shares at a fixed price. Then, if the stock does halve tomorrow, you can instead sell your shares at that higher price at less of a loss.
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