Jonas Elmerraji
How could you have hedged here?
Well, options are certainly a good option. Buying put options on Indevus would be a way to lock a "floor" in for the stock. Those put options give you the right to sell shares of Indevus for a pre-set strike price, so if you bought $5 puts, you would be able to sell your shares for a lot more than the $1.38 they're currently trading at. Let's say that you bought puts, but the stock did fine after all. That's the beauty of options -- you can just let them expire and take the gains from your long position. Beyond Stocks Hedging isn't just for stocks. It's a method that's also used heavily by people who trade commodities and foreign exchange. Since options are just for stocks, there are other derivatives (like futures) that come into play for hedging commodities and the like (for more on derivatives, check out "A Look at Derivatives and Precious Metals"). Hedging is often used as a business strategy as much as an investment strategy. Businesses that spend lots of money on commodities (or commodity-based goods) can increase their profitability by using hedges. A lot of hedging goes on in the energy world. For example, airlines often have in-house trading desks that hedge against the rising cost of jet fuel, and Enron's infamous rise to prominence came about largely because of the gas hedging that they helped make common practice. But despite the awesome benefits hedging can provide, like anything else, it does have its detractors.
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