As ASX Listed CFDs track dollar for dollar and cent for cent with the underlying, holding an opposing position in the CFD against what you hold in the underlying will offset any losses incurred.
A long (bought) share position in BHP for instance can be hedged by holding a short (sold) position in ASX BHP CFDs.
Individual stock protection example
From time to time we become nervous about a stock that we have held for years (for example the recent sub-prime debt crisis) and although we believe our stock will be a winner in the long-term we are worried about its more immediate prospects.
Obviously we could sell the stock, but that would trigger Capital Gains Tax (CGT). With the appreciation some stocks have experienced over the past few years this can be substantial.
Instead of triggering a CGT event we can sell the equivalent amount of CFDs effectively negating our position in the underlying stock.
Better still this hedging strategy pays an income every night that we hold the short CFD position.