An offsetting transaction, in finance, refers to a trade that is made to cancel or offset an existing position or trade. The idea behind offsetting transactions is to close out an open position to limit potential losses or lock in gains.
For example, if a trader is long 1,000 shares of ABC stock and believes that the price of ABC stock is going to decline, he or she may sell 1,000 shares of ABC stock to offset the long position. If the trader’s analysis is correct, the decline in the price of ABC stock would be offset by the gains from the short position.
Offsetting transactions can also be used in options trading. For example, if a trader holds a long call option, which gives the holder the right to buy the underlying asset at a predetermined price, the trader can use an offsetting transaction by buying a put option, which gives the holder the right to sell the underlying asset at a predetermined price. This would limit the trader’s potential losses if the price of the underlying asset were to decline.