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Hey everyone,
I’ve been wrapping my head around share options but seem to be getting stuck on one fundamental area – the selling of put and call options.
In Chapter 5, Ex 5, Pg. 65 (The Delta Hedge), Martin owns 1000 options, and wants to “protect against changes in the share price” by devising a Delta Hedge.
My question is: Why does Martin choose to sell call options to achieve this? Is this the only way he can offset any change to the share price (positive or negative)? Additionally why would he want to offset a positive change when he would benefit?
Apologies for a barrage of questions, but if anyone could also explain why someone would want to sell put or call options to hedge against share prices going up or down, instead of just buying puts or calls, I’d really appreciate it.
Thank you.
You must watch the free lectures that go with the notes (there is no point in using the notes on their own because they are only lecture notes). I do explain all of this in the lectures 🙂
Hi John,
I’ve just gone back over the Delta Hedge lecture, and I do appreciate that you do explain that by selling a call option, you hedge against a fall in the share price – because as the share price falls, you make profit from the option.
However I still don’t understand what the difference is between selling a call option and buying a put option. With either choice you’d make a profit on the option from a drop in the share price right?
Sorry I don’t seem to be firing on all cylinders with this topic.
They could buy a put option instead and it would serve the same purpose.
The reason exam questions have you sell a call option is because in practice delta hedges work the other way round in that it is traders who sell call options who then hedge their risk by buying shares (rather than the way it is presented in exam questions which is someone owning shares who is wanting to hedge their risk using options). Although this is the reason, it is not something to worry about for the exam 🙂
Ah okay John, thanks for helping clear this up for me.
This is my first forum post so I’d also like to say thanks so much for all the videos and materials you and everyone at OT have produced – they’re invaluable!
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