- Hedging is a strategy to reduce or eliminate the risk of holding one position by taking on another position
- One simple example is to compare it to insurance, which is basically a form of hedging
- If you are long term bullish on BTC and is afraid of short term price dips, you can buy a put option to hedge your position against a possible crash
- E.g. If you hold 1 BTC you bought at $7,000 and is afraid of short term price dips, you can buy a put option priced at $200 to protect your position against a possible crash.
- If BTC nosedived, your maximum loss will be capped at $200. Here’s how it works.
- If BTC dipped to $6,000 on Settlement Date, you will lose $1,000 value from your BTC. However, your put option will have an intrinsic value of $1,000 and can be sold for that amount thus offsetting potential losses and limiting your loss to your Premium Payable.