What It Means
Hedging means taking a position specifically to offset potential losses in another position you already hold — it's protection, not a fresh bet on where price goes next.
How It Works
A trader long on a stock might buy a put option on the same stock: if the stock falls, the loss on the shares is partly or fully offset by the gain on the put. A business exposed to commodity price swings — say, a jeweller sensitive to gold prices — might use futures the same way, locking in a price rather than speculating on one. Hedging always has a cost, whether that's the option premium paid or the upside given up, so it's a trade-off between certainty and potential gain, not a way to eliminate risk for free.
Example
Suresh holds 500 shares of a stock bought at ₹400 and is worried about a short-term dip before an upcoming earnings announcement. He buys a put option with a strike of ₹390 for a ₹8 premium per share. If the stock falls to ₹350, his shares lose ₹50 each, but the put gains roughly ₹40 each (₹390 strike minus ₹350, less the premium paid) — softening the blow without forcing him to sell his shares.