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Hello
I have a question related to hedging against a fall in share prices.
Can you explain the reasoning behind selling call options to hedge against a fall in share prices?I assume that you have watched my lecture on options.
If so, you will appreciate that if the share price falls, then the price of call options will also fall.
So……if we sell call options now and then buy them back later, it means that we will make a profit on them which will ‘cancel’ the loss we make on the shares themselves by the price having fallen.
if your selling then it means that someone is buying….so why would anyone want to buy call options if the market is expecting a fall in share prices?
The market is not necessarily expecting a fall in share prices at all.
I might be expecting share prices to rise, but selling call options will protect me against the possibility that I am wrong and that the price of share that I currently own will fall. It protects me against that risk.
You might find the free lecture helpful 🙂
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