Chapter 05 · Section 5.1
Hedging a Long Position
With a long stock position of 100 shares, what would a hedger do to hedge his position?
a) Buy calls.
b) Buy puts.
A long position in shares implies unlimited profit and a loss potential of up to the price paid for the shares.
A call conveys the right to buy the underlying asset at a predetermined price. An increase in the value of the underlying makes the call more valuable.
A put conveys the right to sell the underlying asset at a predetermined price. A decrease in the value of the underlying makes the put more valuable.