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Paul Tracy

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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated September 30, 2020

What is an Offsetting Transaction?

An offsetting transaction is a transaction that cancels out the effects of another transaction.

How Does an Offsetting Transaction Work?

Offsetting transactions are common in options and futures markets. For example, let's say John Doe sells an option to buy 100 shares of Company XYZ with a strike price of $20 per share. The option expires in one year. Because John is locked into the contract, he cannot just ignore it. So, he enters into an offsetting transaction by buying an identical opposite transaction (buying an option to sell 100 shares of Company XYZ with a strike price of $20 that expires in one year). This offsets the risk he bears with the first option.

Why Does an Offsetting Transaction Matter?

Offsetting transactions are risk-management tools, and investors and companies use them when they cannot simply cancel the original transaction. In the derivatives markets, this happens when investors cannot accept a delivery of thousands of pounds of coffee from a futures contract, for example.

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