Economist Peter Dawson said UAL's experience is a classic example of the nature of hedging. "Even though it's designed to reduce risk, hedging involves risk of loss, particularly if the market moves against you in a big way. That happened in UAL's case with oil dropping more than $100 per barrel," Dawson said. "In hedging, you could make a rational move, like UAL, and be very wrong and lose money bigtime."

That was case for a suburban New York City co-op complex, as well. Mike Murphy of Harrison, N.Y., board member for a 70-plus unit co-op, said the co-op complex decided to hedge the residence's heating oil expense by buying heating oil futures contracts. "The market reversed, and even though it makes us even given that we save a dollar in upfront heat expense for every dollar we lose with the oil trade, the reality is the co-op is losing more money than if we simply did not enter the trades," Murphy said. "A lot of money."

"And believe me, the co-op's residents have let us know about it," Murphy added.

Market Analysis: Hedging involves other costs, as well, such as the transaction/broker cost of the trade or option. Therefore, research the market thoroughly before you hedge. Ask: is my risk of loss greater under current market conditions without a hedge, or under a market reversal with a hedge? If it's the latter, the hedge may not make sense, on a risk-adjusted basis.