Over-Hedging
Candlefocus EditorOver-hedging can take several forms. In the most common form, an investor takes an opposing position to the existing one but with a larger size than the original one. For instance, if playing the stock market, an investor might buy a certain amount of stock and then take an additional short position in the same stock with a larger share size. In this case, the investor has over-hedged, and the net position is one of shorting instead of holding long.
Even if over-hedging is intentional, it may still lead to losses. This is because the investor is speculating that the price of the asset will move in a different direction than the original position. This can result in a loss if the prediction is wrong and the price moves in the direction of the original position.
Over-hedging is a generally inefficient strategy and usually not recommended for most investors. A better approach is to regulate the size of your positions and hedge them in an appropriate manner. Regulated hedging positions allow investors to manage their risk and maintain a net position that is in line with their original position.
In summary, over-hedging is a strategy in which an investor takes an offsetting position that is larger than the original one. While it may be intentional, it is generally an inefficient strategy that is not recommended for most investors. Instead, it is best to manage the size of your positions and hedge them in a regulated manner in order to maintain a net position that is in line with your original position.