SIE (Training Consultants v3.5, 2025): Ch. 3 Equity Options, Sec. 4: Hedging with Options

Hedge / Hedging

A market strategy used to offset investment risk by protecting an existing stock position.

Protective Put

A strategy where an investor owns the stock (long) and buys a put option to protect against a decline in stock price.

Married Put

A protective put purchased at-the-money, providing direct downside protection for a long stock position.

Long Call Hedge

A strategy where an investor is short the stock and buys a call option to protect against a rise in stock price.

What is hedging in the context of options?

Using options to protect an existing stock position (long or short) against adverse price movements.

Which option provides the best downside protection for a long stock position?

A long put.

What is a protective put?

Being long the stock and long a put to limit losses if the stock declines.

When is a put called a married put?

When the put is purchased at-the-money while owning the stock.

Which option provides the best upside protection for a short stock position?

A long call.

What does a long call hedge protect against?

A rise in the price of a stock that is shorted.

When hedging, which side of the market should the option position be on?

Opposite of the side of the market of the stock position.

Why do investors generally want to be long options when hedging?

Because long options provide protection against adverse price movements without unlimited risk.