What would be the best way to hedge a short call option position?
2007-02-06 05:42:51 · 5 answers · asked by Invest4$ 1 in Business & Finance ➔ Investing
There are a number of choices one has to hedge a short call option.
A perfect hedge (at expiration) would of course be to buy 100 shares of the underlying equity.
A more dynamic hedge would be to calculate the delta of the call option and then hedge it with the required number of shares to make that delta neutral. For help with this try this spreadsheet below I designed a few years ago.
http://tools.financialhub.info/positioncalculator.xls
There are also more complicated choices, but these are the basic ones that come to my mind.
2007-02-06 06:58:20 · answer #1 · answered by Dr. Daniel 2 · 0⤊ 0⤋
Options give the ability to limit down side- for a price of course. An example is called a protective put position. Lets say that you own 100 shares of XYZ corp. The shares trade at $50. If you think that there is upside potential, but you are worried about the downside, you can buy (aka take a long position) in a put option on XYZ corp- let's say the strike price is $40. This option gives you the right to sell the shares for $40 anytime prior to expiration. Now, lets say that the stock price rises to $55. This gives you a return of $5 per share less the cost of the option. If the stock falls to $45, you lose $5 per share along with the cost of the option. If the stock falls to $35, you can exercise the put and sell the shares for $40 and the option writer is obligated to buy the shares. In this case, you lose $10 per share along with the cost of the option. However, this may be less than the $15 that you would have lost without the option. This is the nature of the hedge. It lets you get rid of some of your unwanted risk.
2016-03-29 07:55:14 · answer #2 · answered by Anonymous · 0⤊ 0⤋
You can also consider buying a future if available on the underlying value, or buy the same calls for the next maturity date, and do it in relation to the delta's. Your short positions should lose value faster than your long position thus earning you money. And when the position goes completely wrong, the values will offset each other more or less, so you don't lose your shirt.
2007-02-06 06:11:30 · answer #3 · answered by Cheanea 3 · 0⤊ 0⤋
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2017-03-01 12:27:49 · answer #4 · answered by ? 3 · 0⤊ 0⤋
Buy the stock or go long calls and create a spread - you keep your premium if the stock stays stable and limit your loss if it starts to climb
2007-02-06 05:55:13 · answer #5 · answered by dashel_gabelli 3 · 0⤊ 0⤋