Chapter 05 · Section 5.1
With increasing prices...
Hedging a Long Spot Position with a Long Put
Long Spot Position Long Put Combined
Declining practically
prices: unlimited exercise limited
loss
Increasing unlimited expire
Prices profit or sell
With increasing prices, the combined position gives:
a) Unlimited profit potential.
b) Limited profit potential.
With increasing prices, the hedger is not interested in selling the asset he is long, using the option. He will therefore let the put expire or sell it in order to recapture any remaining time value.