Over Hedged

The term Over Hedged refers to when a trader has several trading positions on his book that he has corresponding hedging trades.

While a perfect hedge on a trade will theoretically reduce all risk, it will do so at the expense of reducing the positions potential for any gain.  With this in mind, most hedges are set up with the thought of reducing risk to an acceptable level, but still leaving a measureable level of risk on the books of the traders account.  All gains from the trader’s book are then produced off of the remaining risk on the books after the hedge.  In the case of the Over Hedged position, the trader has de-risked the positions in his book to the point of excess long or short in the hedging direction.  This excess long or short hedge becomes a speculative position, and then serves as the driver of the potential gain of the trader’s total book.