Chapter 05 · Section 5.1

Hedging a Short Position 2

Short Spot Long Call Combined Position Position Position

Declining practically expire practically prices: unlimited or sell unlimited profit profit

Increasing unlimited exercise ....... prices: loss

With increasing prices, the combined position has:

b) limited loss potential.
Yes. The long call position limits the loss potential of the combined position. It will be limited to the premium paid, if the hedger decides to hedge with at-the-money calls. Continue