Advantages and disadvantages of hedging

Advantage: When Lehman Brothers collapsed in 2008, shareholders were left with useless stocks that had crashed at a fraction of their original price. Hedging can keep you in business when things go from bad to catastrophic.

Cons: Hedging takes away some benefits from your trading. Minimising risk does not correlate with maximising profit, so hedging is only worthwhile if you expect a sudden spike in volatility. If your investments are slowly chugging higher, hedging will be more of a liability than an effective protection plan.

Benefit: Investors with low risk tolerance can preserve not only capital but also peace of mind with a hedge. It is said that investors often choose between two extremes - eating well or sleeping well. A risky investment portfolio might yield profits that allow investors to buy an expensive steak every night, but they might toss and turn at night thinking about uncertainty. Hedging allows investors to eat well from consistent gains AND sleep well at night knowing they are not taking on too much risk.

Cons: Here is good point from infoexness.com:

การป้องกันความเสี่ยงสามารถช่วยปกป้องทรัพย์สินของคุณที่ เข้าระบบ Exness ในช่วงที่ตลาดตกต่ํา แต่เช่นเดียวกับที่โต๊ะแบล็คแจ็คมีข้อเสีย. ท้ายที่สุดการป้องกันความเสี่ยงเป็นการเดิมพันต่อผลประโยชน์ของคุณเอง.

Hedging is usually about buying one financial asset to offset the risk of another separate financial asset. As every trader knows, buying financial assets always involves transaction costs, even though commission-free trading is now the norm. If your hedging strategies are not well planned and executed, the capital you seek to preserve could be eaten up by fees and trading costs. Always consider both trading costs and estimated profits/losses when hedging.

Examples of hedging in trading

•     Diversification - The oldest and best known form of hedging is simple diversification. By buying a variety of different financial assets, your portfolio is not tied to any one security or industry. If tough times hit automakers and you hold GM and Ford, a portfolio balanced with technology and banking stocks could offset the losses from auto stocks. Target-date funds are great examples of reducing risk through diversification.
•     Covered call options - A covered call is when you buy a stock while writing call options on the same stock (i.e. selling). If you buy ABC shares with the aim of long-term price appreciation, you may experience flat trading periods where the share fluctuates within a defined range. If you expect this trading range to continue, you can sell a call option on the stock that provides returns while your stock is trading flat. Note that this strategy can backfire during periods of high volatility, but using covered calls is one of the most common forms of hedging with options.
•     Out-of-the-money put options - To protect stock holdings against an unknown negative event (or black swan), some traders choose to buy long-dated put options with a strike price well below the current stock price. These put options are attractive because they are cheap but almost always expire worthless. Unlike covered calls, out-of-the-money put options only save money if there is a serious market correction. Much like buying a "catastrophic" health plan, this strategy is cheap insurance against the worst-case scenario. Just understand that you will spend 99% of your trading time bleeding profits out of the money with put options.
•     Hedge with commodity futures - Many industries depend on cheap commodities to keep prices low or profits high. When oil prices are low, airlines can fuel their jets cheaply. When the price of coffee skyrockets, Starbucks and Dunkin Donuts have to raise the price of their drinks at the same time. When companies have this kind of relationship with a tradable commodity, investors can use this to their advantage. If a trader holds shares of Southwest and Delta Airlines, he can hedge those holdings by buying oil futures. If oil prices rise rapidly, the airlines' stocks will come under pressure due to increased fuel costs, but the trader will make money on the futures contracts.