Real-world examples of hedging strategies: using options to hedge risk

Theory is nice, but investors remember what worked when markets were falling. To make this practical, we’ll walk through several examples of hedging strategies: using options to hedge risk that show up again and again in professional portfolios:

• A retiree protecting dividend stocks before earnings season
• A tech employee hedging a concentrated position in their employer’s stock
• An ETF investor using index options to ride out election-year volatility
• A global investor hedging currency risk on foreign holdings
• A trader protecting short positions from sudden short squeezes

By the end, you’ll recognize the patterns behind these examples and know which versions might fit your own situation.

Core idea behind using options to hedge risk

Options are insurance contracts written on an underlying asset: a stock, ETF, index, or currency. You pay a premium up front to transfer part of your risk to someone else.

Two basic building blocks underlie most examples of hedging strategies: using options to hedge risk:

• Put options give you the right (but not the obligation) to sell at a fixed price (the strike) by a certain date. They protect against price drops.
• Call options give you the right to buy at a fixed price. They can protect short positions from explosive rallies.

Most hedging strategies are just smart combinations of these two tools, tailored to your risk, time horizon, and budget.

For background on how options work at a high level, the U.S. Securities and Exchange Commission has a plain-English guide to options and risk here: https://www.sec.gov/investor/pubs/options-brochure.pdf

Example of protective put: insuring a stock position

One of the cleanest examples of hedging strategies: using options to hedge risk is the protective put. Think of it as collision insurance for your portfolio.

Scenario:
You own 1,000 shares of a large U.S. bank at $50 per share. You like the long-term outlook, but you’re worried about a short-term selloff around the next Federal Reserve meeting.

Hedge:
You buy 10 put option contracts (each covers 100 shares) with a strike price of \(45, expiring in three months. You pay, say, \)1.50 per share in premium.

• Maximum loss (ignoring small frictions) is now about \(6.50 per share: \)5 down to the strike plus $1.50 in premium.
• If the stock crashes to $35, the put rises in value and offsets most of the loss.
• If the stock rallies to \(60, your only regret is the \)1.50 premium.

This is one of the best examples of options-based hedging because it’s intuitive: you cap your downside while keeping unlimited upside. The trade-off is the ongoing cost of premiums, which can be significant in volatile markets.

Covered call with a protective collar: hedging while generating income

A collar adds another layer to the protective put. It’s a classic example of using options to hedge risk when you want downside protection but don’t want to spend a lot of cash on premiums.

Scenario:
You hold 2,000 shares of a blue-chip stock at $80. The stock had a strong run in 2023–2024, and you’re nervous about a 15–20% pullback but don’t want to sell for tax reasons.

Hedge:

• You buy 20 put contracts with a strike at $72, expiring in six months.
• You sell 20 call contracts with a strike at $92, same expiration.

The call premium you collect helps pay for the put. Sometimes you can structure the collar at zero net cost, where the call premium fully offsets the put cost.

Result:

• Your downside is limited below $72 (plus or minus small slippage).
• Your upside is capped above $92; if the stock closes above that, the shares are likely called away.

This collar structure shows up frequently in 13F filings from institutional investors and is one of the most widely used examples of hedging strategies: using options to hedge risk for large, appreciated positions.

Index puts for portfolio-level hedging

Hedging individual names can be messy. Many investors prefer to hedge at the portfolio level using index options on the S&P 500 (SPX), Nasdaq 100 (NDX), or ETFs like SPY and QQQ.

Scenario:
You manage a $1 million equity portfolio that tends to move roughly in line with the S&P 500. You’re worried about a spike in volatility around a U.S. election or a major inflation report.

Hedge:
You buy S&P 500 put options with a strike about 5–10% below the current index level, expiring just after the event you’re worried about. You size the notional value of the options so that a sharp market drop would be largely offset by gains in the puts.

Why this matters in 2024–2025:

• Index volatility tends to spike around macro events (Fed decisions, CPI releases, geopolitical shocks).
• Buying short-dated index puts into those events is a common institutional hedge.

This is another strong example of hedging strategies: using options to hedge risk: you protect the whole portfolio with one trade instead of trying to hedge every single stock.

For more on how index-based risk management works, the Federal Reserve’s Financial Stability Reports regularly discuss volatility and market stress: https://www.federalreserve.gov/publications/financial-stability-report.htm

Hedging a concentrated position: employee stock risk

Employees at big tech or biotech companies often hold a large chunk of their net worth in a single stock. That concentration risk is enormous, especially in sectors where 20–30% drawdowns can happen in weeks.

Scenario:
You work for a high-growth tech firm. Between stock grants and options, you effectively have $800,000 tied up in one name. Lockup rules and personal loyalty make you reluctant to sell aggressively.

Hedge options:

• Long-dated protective puts (LEAPS): You buy put options expiring 1–2 years out, struck maybe 20% below the current price. This is portfolio insurance against a company-specific disaster.
• Rolling collars: You repeatedly sell out-of-the-money calls and use the income to fund puts, creating a series of short-term collars that cap both upside and downside.

These are textbook examples of hedging strategies: using options to hedge risk in concentrated wealth situations. They don’t eliminate risk, but they can dramatically reduce the probability of catastrophic loss.

The CFA Institute has in-depth material on managing concentrated positions and options-based solutions: https://www.cfainstitute.org/en/research/foundation

Currency hedging with FX options

Options aren’t just for stocks. Global investors routinely use currency options to hedge foreign exchange risk.

Scenario:
You’re a U.S.-based investor holding a European stock ETF denominated in euros. You like the companies, but you’re worried the euro might weaken against the dollar over the next year, cutting into your returns.

Hedge:
You buy euro put / dollar call options in the FX market. If the euro falls, the option gains can help offset the currency loss on your ETF.

Real-world context:

• After years of relatively low FX volatility, 2022–2024 saw larger currency swings driven by diverging interest rate policies.
• Large asset managers increasingly highlight currency risk in their global allocation reports and often show examples of hedging strategies: using options to hedge risk on FX exposures.

This approach lets you keep your international equity exposure while dialing down the currency swings that come with it.

Protecting short positions with call options

Not all hedging is about long portfolios. Short sellers use call options as a safety valve against violent rallies and short squeezes.

Scenario:
You are short 5,000 shares of a highly shorted meme stock at $20. Social media chatter is heating up again. You still believe the stock is overvalued, but you can’t afford a repeat of a 2021-style squeeze.

Hedge:
You buy out-of-the-money call options, say with a strike at $30, expiring in one month.

• If the stock spikes to $60, your short is deeply underwater, but the call options explode in value and offset a chunk of the loss.
• If the stock drifts down or sideways, the calls may expire worthless, but they bought you peace of mind.

This is a classic example of using options to hedge risk on the short side: you cap the worst-case scenario while keeping most of the potential profit from a gradual decline.

Volatility hedging: buying options as a tail-risk hedge

Some investors don’t care which direction markets move; they care about how violently they move. Volatility itself has become an asset class, and options are the primary tool for hedging against volatility spikes.

Scenario:
You run a diversified portfolio that tends to suffer during sudden volatility shocks, such as the COVID-19 crash in early 2020. You want a standing “airbag” in the portfolio.

Hedge:
You regularly buy out-of-the-money index puts or call options on volatility-linked products. Most of the time, these options decay. But during a crash, they can deliver large gains that offset broad portfolio losses.

Funds that specialize in tail-risk hedging often publish real examples of hedging strategies: using options to hedge risk that look like this: small, frequent losses on option premiums punctuated by rare, very large gains during crises.

For academic work on volatility and tail risk, you can explore research from universities such as MIT and Harvard: https://mitsloan.mit.edu/ideas-made-to-matter and https://www.hbs.edu/faculty/Pages/default.aspx

How to choose among different examples of hedging strategies

Seeing multiple examples of hedging strategies: using options to hedge risk is helpful, but the real question is: which one fits you?

A few practical filters:

• Time horizon: Short-term event risk (earnings, Fed meetings) often calls for short-dated options. Long-term concentration risk leans toward LEAPS and rolling collars.
• Risk tolerance: If you can’t stomach large drawdowns, protective puts or collars make sense. If you’re comfortable with some downside but fear catastrophic tail events, out-of-the-money index puts may be enough.
• Cost sensitivity: Buying puts outright is the cleanest hedge but can be expensive. Strategies that sell options (like covered calls or collars) reduce or offset that cost but also cap upside.
• Correlation: Index options are more efficient if your portfolio tracks the index reasonably well. If you hold idiosyncratic names, single-stock options may be necessary.

The best examples of hedging strategies are the ones that explicitly match your risk, capital, and behavioral limits—not just what looks clever on a whiteboard.

Risks and limitations of using options to hedge

Every hedge has trade-offs. Some key limitations that show up across most examples of hedging strategies: using options to hedge risk:

• Cost drag: Repeatedly buying options can be a steady performance headwind, especially in low-volatility periods when the market grinds higher.
• Basis risk: Your hedge may not move perfectly opposite your exposure. For instance, an S&P 500 put won’t perfectly hedge a portfolio full of small caps.
• Timing risk: Options expire. If the bad event happens a week after expiration, the hedge doesn’t help.
• Complexity: Multi-leg strategies (spreads, collars) require careful sizing, monitoring, and an understanding of option Greeks like delta and theta.

Used thoughtfully, though, the real-world examples in this article show that options can transform a binary outcome (win big or lose big) into a narrower, more manageable range of results.

FAQ: examples of options hedging in practice

Q: What is a simple example of using options to hedge a stock position?
A: A straightforward example is buying a protective put on a stock you already own. If you hold 100 shares of a company at \(40 and buy a three-month \)35 put, you’ve set a floor under your position. If the stock falls to \(25, you can still sell at \)35 through the option, minus the premium you paid.

Q: Are there examples of hedging strategies: using options to hedge risk without capping upside too much?
A: Yes. Out-of-the-money puts on individual stocks or indexes are a common approach. They don’t protect you from small declines but kick in during big drawdowns, allowing most of your upside to remain intact while still guarding against severe losses.

Q: Do professional investors actually use these examples of options hedging, or is this just theory?
A: Large institutions, hedge funds, and corporate treasuries regularly use options to manage risk. You can see real examples in regulatory filings and in the risk management sections of annual reports, where firms describe using options to hedge equity, currency, and commodity exposure.

Q: What are some examples of low-cost hedging strategies using options?
A: Collars are a popular low-cost example. By selling a call and using that premium to buy a put, you can often create a hedge with little or no net cash outlay. Another approach is to hedge only a portion of your exposure, such as buying index puts that cover 30–50% of your portfolio.

Q: How do I know if an options hedge is worth the cost?
A: Compare the expected cost of the hedge (premiums over time) with the potential benefit during a severe drawdown. Many investors run scenario analysis: “If the market drops 20%, what does my portfolio look like with and without this hedge?” If the hedge significantly improves outcomes in scenarios you care about, the cost may be justified.

Used thoughtfully, the examples of hedging strategies: using options to hedge risk we’ve covered—from protective puts and collars to index and currency hedges—can turn unmanaged market exposure into a more controlled, intentional risk profile. Options don’t remove uncertainty, but they let you decide which risks you want to keep and which you’d rather pay someone else to carry.