Options can be used as hedging strategies to reduce investment risk. Hedging involves taking an offsetting investment position to limit losses from the primary position. One hedging strategy is covered calls, where an investor writes call options against a long stock position to generate income from premiums while limiting upside potential to the strike price in exchange for downside protection. The main risk is opportunity cost if the stock rises rapidly above the strike price.

1. Financial Derivatives(KMBFM05)
Option Hedging Strategies (Part1)
Prepared by :
Taru Maheshwari
Sr.Asstt.Prof. ABESEC
AKTU (Lucknow)

2. Option Hedging Strategies
• Options with are often used as combinational strategies to hedge risk.
• Hedging is a strategy used by investors to reduce or eliminate the risk of
holding one investment position by taking another investment position.
• One of the primary benefits of options is the ability to limit losses and
protect gains on your stock investments.

7. Covered Call
• Must own stock or holding position in futures
• Must have a clear view market would not rise to particular level.
• If stock rises you gain on your stock holding but may loose on in call writing but it
is compensated.
• Don’t write naked calls or speculate.
• Upside potential is limited to the strike price minus spot price minus premium
received.
• Main loss is opportunity lose if market rises rapidly.