The quiz assumes a hedge or income strategyfor short shares eg short 500 shares msft is 5 calls at some price.
Two questions assume this
However it could be a short put too .
Think this way
Scenario 1 in the quiz
Msft sold short at $200
Call bought at 205 yes this Pair makes a hedge/ income
Scenario 2
Msft sold short at 200
Before mkt moves at same time, Sell puts at $300 well above the 200. So high that very little chance of reaching it before it expires.
The premium will be at least 300-200=100 maybe 105
But hey it’s not money out of pocket like scenario 1 !
Comment please
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Hi, thanks for reaching out - I’m not sure I understand your question. Could you please clarify?
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Thank you!
i closed the quiz so i cant find the question.
the question asks what is hedge for shorting a stock
the answer is “long call”
My point is a short put could also be a hedge with very probability though not 100%
and it is a cheaper alternative to buying a call.
in my example MSFT is shorted at $200 and at same time sell a PUT at $400 7 days from today
Assumption is MSFT wont double in 7 days. Note this will result in additon of money to account whereas the book answer removes money to pay for the call
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Hi @Ernesto_Bahringer, I’m not sure that situation is accurate.
A $400 put when the market is at $200 means this option is already in the money. You would have made $200 from selling your shares short, but then have to pay $400 to buy their shares at a $200 loss. The premium could possibly make it profitable given the right conditions, but you no longer hold a stock position. It is closer to an income strategy than a hedging strategy.
On the other hand, if you’re paying to limit your exposure to risk, there’s a high chance that’s a hedging strategy.
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