Hedging Using Options | Option (Finance) | Call Option
Trading options gives you the right but not the obligation to buy or sell the underlying security at a set price. You can buy call options if you believe the price of the security will rise. When the call option is exercised, you can buy the stock at the low price and sell it at the higher market price for a profit.
You can protect your call option position and your trading principal against an unexpected market downturn by using a hedging strategy. Consider your risk tolerance and determine what percentage of the position you want to hedge. Calculate the amount you need to hedge by multiplying the option cost by the position percentage you want to hedge.
Consider buying an out-of-the money put option to hedge your call option position. Make sure you select a put option with the same expiration date as your call option. For example, if your call option expires the third Friday of the month, select a put option that expires the same day. Be sure to purchase the same number of put options as call options. If you bought three call options, you must purchase three put options to hedge all three positions.
Short the stock if the premium for the put option is too high for the amount antlr options output ast hedging it provides.
For example, one option controls shares of stock. Since the cost to short the stock is less renko bar trading strategy the cost of buying a put option, shorting the stock is a more cost-effective way to hedge your call option position.
Use a credit default swap as an inexpensive way to hedge your call option position. Think of a CDS as an insurance policy for your option. It will only pay off if the market moves against your position. A CDS moves in the opposite direction of the market.
For example, you would hedge your call position that was in an uptrend by purchasing a CDS that was in a downtrend. Credit default swaps are available through the CME Group and the Intercontinental Exchange. Use a hedging strategy to protect your option trade. Tip Consider hedging your trade hedging with call options placing a loss limit on your option.
References Trading in Options and Futures: Hedging in Options Trading CME Group: Cleared OTC Credit Default Swaps ICE Exchange: OTC Credit Default Swaps. What Does It Mean to Exercise Stock Options? Why Is a Call Option Called a Call? How Does a Put Option Work?
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