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| Pros | Cons |
| Hedging with futures |
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| - Typically greater liquidity than options
- No cost to enter
- No requirement for frequent adjusting /rebalancing
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- Forgoes any potential appreciation in hedged instrument(s)
- More distant (in price) contracts increase basis risk
- More distant (in price) contracts are less liquid
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Insuring with options
(Option insurance strategy) |
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| - Offer upside gain while hedging downside losses
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- Initial outlay of option premium requirement
- Option premium crea an imperfect hedge
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| Delta hedging with options |
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| - Opportunity to capture upside gains, if they occur
- More closely hedge the exposure (than the option insurance strategy)
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- Constant rebalancing requirement
- Expensive transaction costs because of frequent rebalancing
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