Long Hedge
Categories: Derivatives
You were long KO at $50 a share. The stock has had a good run. But now you're...nervous. You don't want to just sell the stock and pay tax on the gain and unwind things altogether. You're worried about the whole market's performance coming. So you create a hedge against your long.
Lots of ways to do this. One way would be to short KO at $65 a share. That dance is called "shorting against the box." You could also buy put options to hedge your long, i.e. paying $2 a share to buy the right to sell KO any time in the next four months for $55 a share.
So in this case, yes, you'd lose 10 bucks a share on the way down...but you'd lock in your 5 dollar gain from the $50 at which you bought, minus your 2 dollar hedge costs.
Lots of ways to buy term life insurance for your investments.