strategy in call_and_put_options

Jun 28th, 2015
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The pay-off from the Long Call will increase thereby compensating for the loss in value of the short stock position. This strategy hedges the upside in the stock position while retaining downside profit potential.

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RM2-12.06-98Hedging With a Put OptionC. Anderson, J. Smith, D. McCorkle and D. OBrien*Put options are a pricing tool with considerable flexibility for managing pricerisk. The main advantages of a put option are protection against lower prices, limited liability with no margin deposits, and the potential to benefit from higherprices. Futures contracts alone cannot provide this combination of downsideprice insurance and upside potential. The put provides leverage in obtaining credit, assists in production management decisions, and has a formal set of contractprovisions and known procedures for settling disputes. The cost is paid at thetime of purchase and basis risk remains until fixed, or the crop is sold. Eachoption represents a standardized quantity linked to a futures contract, and tradesmust go through a commodity broker.How the Put Option WorksA commodity put option contract gives the buyer (known also as the purchaseror holder) the right, but not the obligation, to sell a specific futures contract at aknown fixed price at any time before or on a certain expiration date. In acquiringthis right, the buyer pays a premium (payment) to the seller of the option

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