What is an 'Offsetting Transaction'

In trading, an activity that exactly cancels the risks and benefits of another instrument in the portfolio. An offsetting transaction is used when it is not possible to simply close the original transaction as desired. This frequently occurs with options and other more complex financial instruments.


In this way, a trader does not have to agree to close the option contract with the party on the other side of the options trade, but can simply cancel the net affect by entering into an offsetting transaction.

Explaining 'Offsetting Transaction'

The most basic example of an offsetting transaction occurs in options trading. Suppose you have sold a call option on 100 shares with a strike price of $35 and an expiration in three months. To close this transaction before three months is over, you can buy a call option with exactly the same features, thus exactly offsetting the exposure to the original call option.


Offsetting transactions typically do not factor in transactions costs.

Further Reading

US income taxation of new financial products
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Organised detachment: Clearinghouse mechanisms in financial markets
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Matching collateral supply and financing demands in dealer banks
papers.ssrn.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

How do regulated and voluntary carbon-offset schemes compare?
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

What future for the voluntary carbon offset market after Paris? An explorative study based on the Discursive Agency Approach
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Reduction of financial instrument volatility
patents.google.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Technical trading revisited: False discoveries, persistence tests, and transaction costs
www.sciencedirect.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …

Understanding carbon offset technologies
www.tandfonline.com [PDF]
… has been placed on extending the number of countries using cap-and-trade systems with offsetting … The CDM has been criticized regarding bottlenecks and transaction costs … disadvantages of some proposals are mentioned (eg that levies on cap-and-trade offset purchases are …