AdvancedMAD Academy0:45Risk

Paying to Remove a Risk

A hedge exchanges an uncertain outcome for a smaller certain cost, which means a hedge that never pays out did its job.

0:45 · 6 scenes

This lesson is part of a MAD Academy plan.

What the Lesson Covers

  1. 0:00A hedge is not a trade that should make money. It is insurance.
  2. 0:05The exchange. You give up some upside, or pay a premium, to cap a loss you cannot tolerate.
  3. 0:14The three common forms. Buy a put, sell a call against it, or hold something that moves the other way.
  4. 0:23Basis risk. Hedging with something correlated but not identical leaves a gap that can widen.
  5. 0:32The accounting to keep straight. Judge the hedge on whether the combined position survived, not on its own profit.
  6. 0:40Price the certain cost against the uncertain loss it removes.
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Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Paying to Remove a Risk — MAD Academy Training Video · MadStockAlerts