Put writing is an essential part of options strategies. Selling a put is a strategy where an investor writes a put contract, and by selling the contract to the put buyer, the investor has sold the right to sell shares at a specific price. Thus, the put buyer now has the right to sell shares to the put seller.Selling a put is advantageous to an investor, because he or she will receive the premium in exchange for committing to buy shares at the strike price if the contract is exercised.
In times of uncertainty and volatility in the market, some investors turn to hedging using puts and calls versus stock to reduce risk. Hedging is even promoted by hedge funds, mutual funds, brokerage firms and some investment advisors. (For a primer on options, refer to our Option Basics Tutorial.)Hedging with puts and calls can also be done versus employee stock options and restricted stock that may be granted as a substitute for cash compensation.The case for hedging versus employee stock options tends to be stronger than the case for hedging versus stock.
Hedging a call option is the process of mitigating the risk associated with options trading. The concept requires a firm understanding of the risks embedded within an option, which can be evaluated using a Black Scholes pricing model. This mathematical model expresses the theoretical risks engrained in a call option, which are called the Greeks of an option.
Option BasicsA call option is the right, but not the obligation, to purchase an underlying stock at a specific price on or before a specific date. Cautious approach how a writer can hedge a put option funds reduce portfolio of a short. A cost of allowing traders also be employed. Option trades occured in hedging can wonder. And profit on the thinkorswim platform.
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