Not a garden purchase.
The buying of a hedge is "life insurance for a security investment." A buying hedge is a purchase contract to buy a derivative of an asset, locking in the price.
It can take a few forms. One could be a futures contract. This contract binds the two parties to either buy or sell the shares at a specific price at a specific time in the future. The contract can be held (and designed) by either the buyer or seller. Agreements like this can be used if an investor thinks they’ll want an asset in the future, and they want to lock in the price today. It could be done by a business as well, if it anticipates having too much of a resource in the future, and wants to get rid of it at today’s nice price.
Say you’re an investor, and a certain technology looks promising. The latest gadget trend, the latest app craze (Pokemon Go Away), etc. Problem is...you don’t have the money right this second. This agreement lets you specify a purchase agreement with that company in the future (when you have the money...you hope). They sell their shares and make money, you get a piece of the investment you want. Everyone wins.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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