options

• 1. Long Position (Own the Asset, Risk of Price Drop)

  • Objective: Protect against falling prices.
  • Hedging Tools:
  • Buy a Put Option:
  • Gives the right to sell at a specific price.
  • Protects downside while keeping upside potential.
  • Sell a Call Option:
  • Generates income to offset losses if prices fall.
  • Caps profits if prices rise.
• 2. Short Position (Owe the Asset, Risk of Price Rise)

  • Objective: Protect against rising prices.
  • Hedging Tools:
  • Buy a Call Option:
  • Gives the right to buy at a specific price.
  • Caps losses if prices rise.
  • Buy a Futures Contract:
  • Locks in a future price to buy the asset.
  • Eliminates risk from price increases.
• 3. Futures Contracts

  • Buy Futures: Protect against price increases (used for short positions).
  • Sell Futures: Protect against price decreases (used for long positions).
  • Effect: Locks in future prices, shielding from unfavorable moves.
• 4. Option Writing Risks

  • Selling Calls (Covered Call):
  • Unlimited loss if prices rise (beyond the strike price).
  • Selling Puts:
  • Loss capped at the strike price if prices fall.