What does 'Offset' mean

An offset involves assuming an opposite position in regards to the original opening position. Additionally, to offset is to liquidate a futures position by entering an equivalent but opposite transaction that eliminates the delivery obligation. The goal of offsetting is to reduce an investor's net position in an investment to zero so that no further gains or losses are experienced from that position.

Explaining 'Offset'

Offsetting can be used in a variety of transactions in to remove or limit liabilities. In accounting, an entry can be offset by an equal but opposite entry that nullifies the original entry. In banking, the right to offset provides financial institutions with the ability to cease debtor assets in the case of delinquency or the ability to request a garnishment to recoup funds owed. For investors involved in a futures contract, an offsetting position eliminates the need to receive a physical delivery of the underlying asset or commodity by selling the associated goods to another party.

Offsetting in Futures Contracts

Investors offset futures contracts and other investment positions to remove themselves from any associated liabilities. Almost all futures positions are offset before the terms of the futures contract are realized. Even though most positions are offset near the delivery term, the benefits of the futures contract as a hedging mechanism are still realized.

Example of Offsetting Positions

If the initial investment was a purchase, a sale is made to neutralize the position; to offset an initial sale, a purchase is made to neutralize the position.

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Further Reading

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