The basic principle of hedging options is to offset the risk in the portfolio by establishing opposite positions. Specifically, investors can adopt the following two hedging strategies:
1. call option hedging: investors can buy call options to hedge the downside risk of the underlying assets they hold. Call option gives the holder the right to buy the underlying assets at an agreed price at some future time. If the price of the underlying asset falls, investors can choose not to exercise the call option, thus only losing the cost of purchasing the option, and will not bear more losses.
2. Buy put option hedging: investors can buy put options to hedge the rising risk of the underlying assets they hold. Put option gives the holder the right to sell the underlying assets at an agreed price at some future time. If the price of the underlying asset rises, investors can choose not to exercise the put option, thus only losing the cost of purchasing the option, and will not bear more losses.
The advantage of hedging options is that it can help investors reduce the risk exposure of their portfolios. By hedging options, investors can protect their portfolios from losses when the market fluctuates, or gain additional income by taking advantage of the changes in the value of options.