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It depends on whether the short call is covered or naked.
If you have a short covered call (you own the stocks you wrote the call on), you wouldn't hedge it--if the call gets exercised you turn over the stocks you own and call it good.
If you have a short naked call (you don't own the stock), hedge with a long call that has a strike price no more than the strike price of the short call. Maybe a few bucks less, if you can get it--if the counterparty to your short call exercises it, you exercise your long call, turn over the stock you received. Your profit will be the difference between the premiums on the calls, plus the difference between the strike prices.
What else can I help you with?
Explain the difference between a put option and a short position in a futures contract?
Well, the first difference is the root difference between a futures contract and an option contract: in a futures contract you MUST complete the sale at the end of the contract (if you didn't buy it back before the settlement date) but in an option you CAN.Once we're past that, the short position in a futures contract--the person who has the item the contract is derived from, such as a thousand bushels of wheat--is the same as the buyer of a put. Both of them have the thing now, and will transfer title to it after settlement or exercise.
What is the proper way to sell call options to protect a long stock position?
A call option is the right to buy a specific stock at a set price (known as the strike price). for this "Right" to lock in a price, the option buyer pays the seller (also known as the grantor) money which is known as the Option Premium. Now here's where most folks get tripped up . . . You can enter the market by Buying the call (go long) or selling the call (grant, go short, or sell). If you buy the call, your risk is limited to the money that you paid the seller, i.e. the Option Premium. Your potential profit is unlimited, in the sense that if you hold the right to buy Apple at $500, you would continue to make money provided Apple continues to rise. However, if you are the seller or grantor - you sell a call - your profit is now limited to the Option Premium that you received, and your risk is unlimited. By selling the option you have essentially made a price guarantee on a stock in exchange for a lump sum payment - the option premium. So some investors utilize what is called "Covered Calls." They buy the underlying stock, say 1000 shares of apple. They are now "long" apple. Next they "Grant" (sell) call options against their long apple position. They receive the "option Premium" on the calls from the buyer, which is credited in their account. They are now long the stock, and short the call options. If apple stays the same or goes down, they owe the option purchaser nothing, and get to keep his money (option premium) once the options expire. If the price rises, the grantor is a loser on the option, but is covered by his long apple stock position, example - if he bought Apple at 400 and then granted Call options against it at a strike price of 400, if apple goes to 500 he essentially takes his winnings on his Apple Stock, and passes them (covers) his call option losses. So to clarify, your answer by selling calls against a long stock position, you lock in the option premium, which could essentially act as a limited cushion in the amount of that premium, should the stock price remain unchanged or fall in an amount of less than the option premium received.
What happens when you Short a call option?
"Shorting a call" is better known as writing a naked call. Basically, a naked call is a call on a position you don't hold, and it has unlimited risk--if you get exercised and the strike price plus the premium is lower than the stock price, you must make up the difference out of your margin account--or you'll receive a margin call from your brokerage. Many brokerages won't allow you to write a naked call, and the ones that will demand a very large margin account and a lot of experience in trading options.
What is the difference between writing a covered and a naked call option?
"Writing", "Selling" and "Granting" are all terms that can mean Going Short the option."Writing a Naked Option" is simply going short the option. It seems super risky because when you Grant Options your profit is limited to the Option Premium that you receive for the Option, yet your risk is unlimited.Naked Call - Profit Limited to Premium Received. Risk is Unlimited, if the market keeps rising, you keep losing.A "Covered Call" as you can infer from the name offers a degree of safety over the Naked Call. In a covered call you limit the risk by buying the underlying security. SO you now have two open positions:Short the CallLong the SecuritySo for example, you buy 1,000 shares of IBM at $50.Then you SELL a Call option to buy 1,000 shares of IBM at $50. You receive $3,000 for the option.So in essence, you have $3,000 (the premium received) in your account, BUT don't celebrate too quickly because you're on the hook should IBM Rise.However, the good news is that IF the market goes against you, you gain on the shares of IBM which pay off the loses on the call. Viola, you are covered.Covered Call - Limiting the risk factors inherent in option granting, naked selling or writing utilizing the underlying securities.- - - - -The difference between writing a covered and a naked call is simple.When you write a covered call, you own the underlying stock. There are some hedging strategies using puts and calls together, and you can also "lock in" profit with a covered call.Example: you own a stock you know goes up and down in price on a cyclical basis (meaning it has a pattern of ups and downs that repeats itself year to year) that you paid $20 for. You think the highest it's going to get is $45, so you write a covered call at $45. You also think it will hit $20 in six months, so you buy a one-year put at $20...but that's not part of this discussion. If it actually does hit $45 you get a nice chunk of change dropped in your brokerage account and your stock becomes someone else's problem.When you write a naked call, you don't own the stock and you believe it will never rise to the call's strike price. In that case your profit is the premium on the option. If it does you've pretty much had it unless you've got your call hedged with another call.
When do you sell a call option?
There are a couple of times you'd do it. The first is if you want to automatically lock in a gain. Let's say you have a stock you bought at 15, and you want to double your money on the investment. So you sell a call at 30 with a long expiration date...oh, maybe a year. If at any time the stock crosses the $30 threshold, you exercise the option. You can also use short calls and long puts (sell a call, buy a put) as a hedging strategy. And then there's the call you sell when you just want to make money by collecting premiums--you sell a call at a higher price than you think the stock will reach, and hope it doesn't go that high.
How do you hedge a short call option position?
You could either buy a higher call and create a credit spread to hedge the short call option OR Buy some of the stock and use it like a covered call strategy.
How do you hedge short put option?
Sell the unerlying stock short.
What is short hedge?
The short hedge is a hedging strategy used by manufacturers and producers to lock in the price of a product or commodity to be delivered some time in the future. Hence, the short hedge is also known as output hedge. The short hedge involves taking up a short futures position while owning the underlying product or commodity to be delivered. Should the underlying commodity price fall, the gain in the value of the short futures position will be able to offset the drop in revenue from the sale of the underlying.
How does a writer hedge a put option?
Long puts are hedged with short calls; short puts are hedged with long calls.
What does a research coordinator for a hedge fund do?
That position in a hedge fund realizes what one is expected to do which is coordinate the investment analysts to ensure that research on long-short, global macro is done properly and in time.
What is the meaning of hedge fund and why they are called hedge funds?
The name of hedge fund originally comes from the fact that hedge funds were able to buy stocks long and sell stocks short, therefore hedging the market risk. So if the market went up or down, the fact that it had long and short positions enabled them to potentially have positive returns regardless of market action. Over time, hedge funds have evolved and they are involved in a myriad of investment strategies and the long-short funds are only a subset of all hedge funds, so that currently the name is a misnomer.
In what ways can CME Eurodollar Futures be used?
CME Eurodollar Futures are a hedge fund where investors can take advantage of short term interest rates. One can find more information on this option via Bloomberg, for example.
Where the name Hedge Fund come from?
The name hedge fund comes from the investment strategy of hedging positions in equity securities. The first hedge fund was created to "hedge" long positions with matched short positions within securities that would reduce the perceived overall risk of the portfolio at hand.
What is the Simple example of hedging?
Let's say you own 200 shares of WMT (Walmart) @ 50$. To hedge this position, you could short 100 SPY (S&P 500) @ 85$ as a hedge a against your WMT position. The theory is that you feel WMT will do better against the broader market. In theory, if the market goes up WMT will go up more than the market. The same rational applies to the downside. If WMT goes down the investor feels that it will go down less than his/her short position (SPY). Using even dollar amounts on both sides is a common practice.
If you use call options to hedge a short sale does exercising the call close out the short?
No. The only way you can close a short is by purchasing the stock and returning it to whoever you borrowed it from.
What is to spread an option?
To spread an option, or to create an option spread, is to put on a corresponding short position onto your existing long position (or vice versa), in order to create options spreads with specific payoff profiles. For instance, if you bought a call option, it would have limited downside risk with unlimited profit potential. But if you sold an out of the money call option on top of that call option, you would create a call spread which lowers capital outlay but also limited upside profit potential.
Use the word perplexed in a sentence?
I was perplexed to see that my next door neighbour had cut his hedge so short.
