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?
Thanks
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.