Chapter 05 · Section 5.1

Hedging a Short Position 1

Hedging a Short Position with a Long Call

Short Spot Long Call Combined

Declining practically expire prices: unlimited or sell profit

For falling prices, the combined position created gives:

a) Practically unlimited profit potential.
Yes. The combined position still allows the hedger to profit from decreasing prices. The only difference, compared to an unhedged position, is the cost of using the call. Continue
b) Limited profit potential.