Institutional traders and persons use selections for hedging. A hedger has a function (owns) some security, usually shares of stock. In order to restriction the attainable for loss if the stock declines in price, the hedger can purchase put options for the stock. In this way, plausible losses are reduced due to the fact if the inventory does fall in price, the alternative ensures the hedger the proper to sell at the strike rate till the expiration date. The maximum loss is the difference (if any) between the rate paid for the inventory and the strike price.

Following are the disadvantages of Hedging

• Hedging includes value that can consume up the profit.
• Risk and reward are often proportional to one other; thus reducing risk means reducing profits.
• For most short-term traders, e.g.: for a day trader, hedging is a challenging strategy to follow.
• If the market is performing properly or shifting sidewise, then hedging provide little benefits.
• Trading of options or futures regularly demand higher account necessities like more capital or balance.
• Hedging is a particular trading strategy and profitable hedging requires exact buying and selling abilities and experience.