How to hedge a short call option

Author: Flash_anton On: 02.07.2017

Hedging Greeks - Hedging short call options

Sometimes an investment has made substantial gains, but you're not ready to sell the assets just yet. When you face this dilemma with call options, you can hedge your position with offsetting put options.

When you purchase call options on stock or another underlying security, you receive the right to buy shares at a designated price called the strike price. You can exercise your right to buy until the option expires, but you are not required to do so.

Put options work exactly the same, except you get the right to sell a security instead of buy it. Suppose you buy a call and put option contract for the same stock at the same strike price. If the stock price increases, you would exercise the call to buy shares at the lower strike price, and then sell at market value, netting a profit.

However, if the price of the stock falls instead, the call option would have no value and the put option would be in the money. However, there are still a few weeks until the option expires and the price might go up even more.

You can hedge the call with a put to protect your gains. To hedge call options with put options, purchase put options equal in number to your call options.

The puts should have expiration dates on or after the call expiration dates. The put option strike price needs to be at, or just below, the current market price of the stock. If the put strike price is above the market price, the puts would be in the money and cost more.

how to hedge a short call option

You have now hedged the call options. A drop in the share price will add value to the put options at the same rate your call options lose value. In a straddle, you simultaneously purchase offsetting put and call options for the same stock with identical expiration dates and strike prices. What makes hedging a call option with a put option different is that the put is bought after the call is in the money and the put strike price is higher than the call strike price.

NIFTY OPTIONS HEDGING STRATEGY BY SELLING CALL & PUT , 2 WEEKS BEFORE THE EXPIRY.

Based in Atlanta, Georgia, W D Adkins has been writing professionally since He writes about business, personal finance and careers.

Adkins holds master's degrees in history and sociology from Georgia State University.

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More Articles How to Hedge Call Options How Does a Put Option Work? Calls and Puts When you purchase call options on stock or another underlying security, you receive the right to buy shares at a designated price called the strike price. Execution To hedge call options with put options, purchase put options equal in number to your call options. Puts and Calls Options Industry Council: About the Author Based in Atlanta, Georgia, W D Adkins has been writing professionally since Recommended Articles How to Hedge Option Trade How to Hold a Call Option How to Decide Whether to Exercise a Call Option How to Sell a Call Option Below Premium Price.

Related Articles How to Calculate Basis When Exercising a Call Option How a Lease Option to Buy Works Is the Call Option Price Affected by a Rise in Strike Price? Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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Hedging With Puts And Calls

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Hedging a Position

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