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HEDGING WITH WRITING CALL AND PUT OPTIONS

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HEDGING WITH WRITING CALL AND PUT OPTIONS
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Sunanda K. Chavan
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HEDGING WITH WRITING CALL AND PUT OPTIONS - October 8th, 2010

Both the strategies discussed above aim at limiting the risk of an underlying position in an equity stock. Options may also be used for enhancing returns from the positions in stock. If the common stock is not expected to experience significant price variations in the short run, then the strategies of writing calls and puts may be usefully employed for the purpose.

As an example, suppose that you hold shares of a stock which you expect will experience small changes in the short term, then you may write a call on these. This is known as writing covered calls. By writing covered call options, you tend to raise the short-term returns. Of course, you will not derive any benefit if large price changes occur because then the option will be exercised or, else, you would have to make a reversing transaction. The writing of covered calls, i.e., agreeing to sell the stock you have, is a very conservative strategy.

To illustrate the strategy of writing a covered call, consider an investor who has bought a share for Rs 100, and who writes a call with an exercise price of Rs. 105, and receives a premium of Rs. 3. The profit/loss occurring at some prices of the underlying share is indicated in table below.
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Re: HEDGING WITH WRITING CALL AND PUT OPTIONS
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Rose Marry
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Re: HEDGING WITH WRITING CALL AND PUT OPTIONS - April 19th, 2016

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Originally Posted by sunandaC View Post
Both the strategies discussed above aim at limiting the risk of an underlying position in an equity stock. Options may also be used for enhancing returns from the positions in stock. If the common stock is not expected to experience significant price variations in the short run, then the strategies of writing calls and puts may be usefully employed for the purpose.

As an example, suppose that you hold shares of a stock which you expect will experience small changes in the short term, then you may write a call on these. This is known as writing covered calls. By writing covered call options, you tend to raise the short-term returns. Of course, you will not derive any benefit if large price changes occur because then the option will be exercised or, else, you would have to make a reversing transaction. The writing of covered calls, i.e., agreeing to sell the stock you have, is a very conservative strategy.

To illustrate the strategy of writing a covered call, consider an investor who has bought a share for Rs 100, and who writes a call with an exercise price of Rs. 105, and receives a premium of Rs. 3. The profit/loss occurring at some prices of the underlying share is indicated in table below.
Hello friend,

Here I am uploading Notes on Put and Call Options, so please download and check it.
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File Type: pdf Notes on Put and Call Options.pdf (939.9 KB, 0 views)
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