Schweser, Exams Vol 2, Exam 2, #43 PM

Question asks how to hedge a position, and the answer is to sell calls. Doesn’t selling calls always just earn you the premium? Don’t know how that is a good hedge…

Any thoughts here regarding this problem?


remember the graphs from level 1?

long call short call long put short put?

i dunno what the question is, but sounds like you long a stock?

if you own stock and wanna hedge, you short a call. Short call diagram is flat from 0 to X, and then linearly decreases forever for price after X.

if stock is going up, you effectively hedged you linearly upward-sloping payoff of your long underlying stock.

if stock is going down, short call is not much of a hedge, but the premium you collect does offset a little bit of your loss.