Part 2 Lesson 2.2 + Hedge Positions

Question 1

Hedged positions

Answer 1

Hedged positions
Stock position + option position
Stock position risk
- Option position offsets risk
• Stock + option contracts

Question 2

Hedged positions: four basic strategies

Answer 2

Four basic hedging strategies
- Certain strategies combine options with positions in the underlying security.
The two hedging strategies are as follows:
• Long stock/long
• Short stock/long
- The two income strategies are as follows:
• Long stock/short call
• Short stock/short

Question 3

Hedged positions, long stock bullish

Answer 3

Hedge positions-long stock (bullish)
- Risk: price goes down
- Appropriate option position to hedge
• Buy a put—total hedge
• Sell a call-partial hedge

Question 4

Hedged positions, long stock, and long put

Answer 4

Investment Strategies
• Hedge positions-long stock and long put
⬆️ B 100 ABC @ 40
⬇️ B 1 ABC SEP 35 PUT @ 3

Purpose
- Protect against big price decline
- Enjoy big price increase

Question 5

Hedge position married, put

Answer 5

Investment Strategies
• Hedge position—married put
- Simultaneous purchase of a stock and a put on that stock
- Specifically identified as a hedge
- The buying of the put does not defer the holding period
- Cost basis = price of the stock + price of the put

Question 6

• Hedge positions
- The covered call-the buy write
- Long stock and short call

Answer 6

⬆️B 100 ABC @ 40
⬇️S 1 ABC SEP 45 CALL @ 7

• Purpose
- Additional income to increase overall return
- Limited price decline protection (premium)

Question 7

Hedge positions short stock

Answer 7

Investment Strategies
• Hedge positions-short stock
- Risk: price goes up
- Appropriate option position to hedge
• Buy call (protection)
• Write put (income)

Question 8

Hedge positions, short stock, and long call

Answer 8

Known as a synthetic, put, and frequently used in trading

   S 100 ABC @ 40 ⬆️  B 1 ABC SEP 45 CALL @ 3

Question 9

Hedge positions, short stock, and short put

Answer 9

Also known as synthetic short and rarely used in trading

⬇️ S 100 ABC @ 40
⬆️ S 1 ABC SEP 35 PUT @ 7

Question 10

Hedge positions ratio rating

Answer 10

Long stock; short, more calls than are covered by stock

LONG 100 ABC @ 90
SHORT 2 ABC JUL 90 CALLS @ 5

Question 11

Hedge positions, rolling strategy

Answer 11

Investment Strategies
• Hedge positions-rolling strategy
- Rolling out or rolling forward
- Rolling up
- Rolling down

Question 12

Hedge positions
Collar

Answer 12

Long stock, long, short, short call
Used to protect an unrealized gain on a long position

LONG 1,000 MNO CURRENTLY TRADING AT $50
LONG 10 MNO JAN 45 PUTS AT 4
SHORT 10 MNO JAN 55 CALLS AT 4

Question 13

Hedging

Answer 13

Hedging is a market strategy used to offset investment risk. Options can be used to hedge or protect an existing portfolio of stocks or an individual stock position that an investor already has.

Question 14

Hedging Strategy

Answer 14

Hedging = Protecting a stock position you already have (long stock or short stock.)
When Hedging you always put on an option position that is on the opposite side of the market than the side yo u are on with the stock.
Hedging limits your risk by putting you on both sides of the market.

Question 15

Hedging Strategies: Long Put

Answer 15

The best downside protection is a LONG PUT, needed when the investor is LONG THE STOCK

PROTECTIVE PUT
MARRIED PUT when the put is **purchased at the money.

Question 16

Hedging Strategies: Long Call

Answer 16

The best UPSIDE protection with options is a LONG CALL, needed when the investor is SHORT THE STOCK.

Question 17

Describe the Hedging Strategy behind a Long Put?

Answer 17

A bullish investor long ABC common stock concerned that the stock may decline in value can hedge or protect his investment against loss by buying a put option to protect against a decline in market value.

Question 18

Describe the Hedging Strategy behind a Long Call.

Answer 18

A bearish investor who is short ABC common stock concerned that the stock may rise in value can hedge or protect his investment by buying a call to protect against a rise in the market value of the stock.