What is hedging in options trading?
Hedging means adding a protective position to cap your risk. Learn how to hedge option trades and reduce margin on Nifty Paper Trade.
Hedging means adding a second position that limits your risk on the first — insurance for a trade. In options, buying a protective option against one you've sold caps your maximum loss and, importantly, reduces the margin required.
A simple example
If you sell a call (large risk), you can buy a further-OTM call as a hedge. Now your loss is capped at the difference between strikes minus premium — and because risk is defined, less margin is blocked. That's exactly how an iron condor uses bought "wings" to cap a sold spread.
Why hedge?
- Caps losses — you know your worst case in advance.
- Lower margin — defined-risk positions need less capital.
- Peace of mind — a runaway move can't wipe you out.
On Nifty Paper Trade, when you sell an option the ticket offers a hedge leg you can add in one step. Deeper read: hedging & margin.
FAQ
Does hedging reduce my profit?
It usually costs a little premium (or caps upside), but it dramatically reduces risk — a worthwhile trade-off for most.
How does hedging lower margin?
A defined-risk (hedged) position can't lose unlimited amounts, so the exchange blocks far less margin.
How do I hedge here?
When selling an option, add the offered hedge leg, or build a spread in the Strategy Builder.