Offset
Candlefocus EditorWhen a trader takes an offsetting position, they assume an equivalent but opposite position to their existing position. This means that they are essentially nullifying the existing position, and the net position is set to zero. This eliminates any liabilities associated with the existing position and the trader can begin anew.
For example, a trader may be long on 10 contracts of corn futures. This means that he has the right to buy 10 contracts of corn at a fixed price at a specific time in the future. To offset the position, the trader would assume a short position on 10 contracts of corn. This means of course that he has the responsibility to sell 10 contracts of corn on the futures market. In effect, the two offsets cancel each other out, and the trader is reset to having zero contracts of corn at a zero risk position.
Offsetting is a common approach across equities, futures and derivatives. Traders commonly use this strategy to limit their risks and liabilities. Offsetting is particularly useful for large traders with considerable positions, as these traders can generate considerable risks and liabilities. Offsetting in the equity and futures markets can also be used to diversify and add hedging to a portfolio.
Overall, offsetting is a powerful risk management strategy used by traders across the financial markets. It is a strategy used to limit liabilities and reduce risks, which can help ensure that traders have more successful trading outcomes.