How to Hedge: Indevus Pharmaceuticals

Insurance Isn't Free

If hedging is an insurance policy for your portfolio, it should come as no surprise that taking advantage of this tactic isn't free. It does cost money to place shorts and buy those put options.

Another cost is performance. When you reduce an investment's risk, you're also reducing the potential payoff that it can provide. When you hedge a stellar investment you might just be cutting yourself out of some serious profit potential.

For both of these costs, the trick is to sacrifice less than you're benefiting. And while that might sound like a tall order for a new investor, as you gain experience with hedging, things become much more intuitive.

To delve deeper into the world of hedging, don't miss these lessons on TheStreet.com:

"Finance Professor: Five Hedging Techniques You Must Know"

"Getting Started With Options"

"Using Leverage to Reduce Risk"

"Risk Management: Learning to Fly"