Length: 1 hour
Learning Objective: Students will learn how to hedge a long position by buying puts.
Your assignment is to hedge a long position using puts. To do this, first choose a long position you already own in your portfolio or buy 100 shares of a stock you think will perform well in the next week. After that, go the the options screener page and search for put options with the stock you’ve chosen as an underlying. Choose the strike price that is closest to the current price of the underlying stock and the expiration date as close to a week from today. Remember, each options contract covers 100 shares, so buy as many contracts as you need to equal the number of shares you are long on.
Monitor the performance of the long stock throughout the week. If the price goes down, exercise your option. If the price stays the same or goes up, leave the option alone.
After you’ve exercised the option or it has expired, write a brief reflection about the exercise. Make sure to answer the following questions: Was the option useful in hedging price drops for my long position? Did I exercise the option or did it expire? Would it have been better to buy the option at a different strike price? Why or why not?
- Portfolio holdings page
- Exercise reflection
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