Hedge
The Natural Gas Hedge
When you hear the term “hedge” perhaps from a Retail Electric Provider or salesman working for an energy company or brokerage you may feel out of the know because if you are not educated in energy terms this may make no sense to you.
A hedge basically creates a position in the futures market that is exactly opposite to what you bought or sold into. This creates an equal correlation with the investment so that if the market goes up or declines you will still be at the original price you bought or sold into. In case you do not know you can sell short or buy long into the natural gas futures market. This means you can make money if the market goes down or make money if the market goes up depending on if you go short or long. That is why you can hedge in the opposite direction after buying long into natural gas futures.
The principle of hedging is simple. It is an equal and opposite position in the energy marker so that if there is a loss in one market it will be completely or as close to it as possible be made up in the other market thereby preserving the original price.
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