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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition, 2nd Edition by Sheldon Natenberg

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 17

Hedging with Options

Futures and options were originally introduced as insurance contracts, enabling market participants to transfer the risk of holding a position in the underlying instrument from one party to another. But unlike a futures contract, which essentially transfers all the risk, an option transfers only part of the risk. In this respect, an option acts much more like a traditional insurance policy than does a futures contract.

Even though options were originally intended to function as insurance policies, option markets have evolved to the point where, in most markets, hedgers (those wanting to protect an existing position) make up only a small portion of market participants. Other traders, including arbitrageurs, speculators, ...

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