What does Double Hedging mean?
A hedging strategy that uses both a futures contract and an options contract to hedge a cash market position. Double Hedging protects investors against losses caused by changes in the cash prices of the underlying instrument.
Futures Knowledge Explains Double Hedging
An investor can hedge a cash market position by both a futures position and an option position. For example, an investor has a diversified stock portfolio of $1 million. He can hedge downside risk in the market by buying put options of $1 million on the S&P 500 or takes a short position in the S&P 500 using index futures contracts of $1 million. If he uses both, it would be called double hedging. Similarly a trader may have sufficient stocks to meet all sales commitment holds but yet he can prefer to go for double hedging and take a long position in the futures market in excess of the speculative position limit as an offset to a fixed price sale.