Length: 1 hour
Learning Objective: Students will learn how to hedge a short position by buying calls.
Your assignment is to hedge a short position using puts. To do this, first choose a short position you already own in your portfolio or short sell 100 shares of a stock you think will perform poorly in the next week. After that, go the the options screener page and search for call options with the stock you’ve chosen as an underlying. Choose the strike price that is closest to the current price of the underlying stock and the expiration date as close to a week from today. Remember, each options contract covers 100 shares, so buy as many contracts as you need to equal the number of shares you are short.
Monitor the performance of the short stock throughout the week. If the price goes up, exercise your option. If the price stays the same or goes down, leave the option alone.
After you’ve exercised the option or it has expired, write a brief reflection about the exercise. Make sure to answer the following questions: Was the option useful in hedging price rises for my short position? Did I exercise the option or did it expire? Would it have been better to buy the option at a different strike price? Why or why not?
- Portfolio holdings page
- Exercise reflection
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