A stock price is currently $50. It is known that at the end of six months it will be either $45 or $55. The risk-free interest rate is 10% per annum with continuous compounding. For a six-month European put option with a strike price of $50, what position in the stock is necessary to hedge a short position in the option

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28-12-2021
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A stock price is currently $50. It is known that at the end of six months it will be either $45 or $55. The risk-free interest rate is 10% per annum with continuous compounding. For a six-month European put option with a strike price of $50, what position in the stock is necessary to hedge a short position in the option

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lheduardomarques lheduardomarques · Answer 1 · 2022-01-07T20:10:30+01:00

To invest in a short position in the option it is necessary to know the risks and possible gains, to understand more about this investment we need to know that.....

Covering the short position in the option

Which stock position is needed to cover a short position in the option, for this, you only need to have a guarantee margin. When closing the position, you must buy the same product on the market at the current price.

In order to carry out a short sale of shares for more than one day,

You will be required a portion of the total invested as collateral.
Remember: you will be operating leveraged. That means more risk involved.

If your operation makes a profit, that margin is returned. However, if it loses, it will be deducted from this guarantee margin.

With this information, we can say that the value of your margin will depend on the stocks chosen and on which platform they are being traded. When picking up the rent, the home broker will show you how much guarantee you will need.

All operations of short position in the option have their risks, the important thing is to study before investing.

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