CFAI 2012 exam Q 9 A :
Options trade sold a put option to a customer. To hedge this position, he needs to sell / buy underlying?
My reasoning: If he has sold a put- the buyer has a right to sell underlying to him if prices drop. To hedge, trader needs to buy the underlying- correct?
The answer says he needs to sell???
He wrote a put . His position in underlying is Long , i.e. he gains if the underlying keeps going up and lets him off the hook on obligations , put goes out of the money
To hedge his long position in underlying he needs to short stock
Draw a picture.
What’s the payoff of a short put option look like? Like this: (/¯).
How do you hedge the downside? With something that looks like this: ().
Sell the underlying.
I got it. Thanks
Excellent!
You’re welcome.
-1/ delta