Chapter 14 Hedges and Straddles: More Creativity
He that will not sail till all dangers are over must never put to sea.
̶̶ Thomas Fuller, Gnomologia, 1732
When options are bought or sold as part of a strategy to protect another open position, the combination of positions represents a hedge. This hedge may be either long or short. The selection depends on the position being hedged and what the trader hopes to accomplish. This usually is determined for the purpose of risk reduction or mitigation.
Although the concept is straightforward, hedging is used in many ways beyond just offsetting market risks. For example:
… market makers on the traded options exchanges generally employ some form of discontinuously adjusted hedging to reduce their risk ...