Passive investors who have a long time horizon and who feel optimistic about the mid- to long-term fortunes of the stock may simply choose to wait out the correction in the stock price. Active traders who are looking to maximize their portfolio’s return at all times have several “hedging” tactics to provide a safety net if an investment starts to fall in value. Some of the most common include:
Buying put options: Put options are contracts that give the owner the right, but not the obligation, to sell a specified amount of an underlying security. Put options are purchased at a specific price and for a specified time frame. If the price on the stock falls, the investor can sell the stock at the price listed on the put option. If the stock price rises, the owner can simply allow the put to expire.
Use stop losses: This is an order that automatically sells a security when it falls at or below a certain price.
Rebalance their portfolio: A diversified portfolio includes assets that are negatively correlated. This can ease downside risk because when one asset class is falling, others will tend to rise. This is a more conservative approach because while it can minimize losses it will also restrict gains.