October 8, 2006 1:22 AM
Hedge Short Selling Losses By Call Options
The most significant difference between short selling and put options is the time element involved for the strategy to pan out. Bearish investors often favor short selling because there are no time limits, other than a possible situation when the registered holder calls in the borrowed stock. Short selling has time on its side whereas put options have a limited life.
Given this, for investors favoring short selling, risk can be minimized by initiating a Synthetic Put. This short-term strategy allows the bearish investor to profit when the stock declines to the downside, but at the same time, protects the short position in case the position goes against the short seller.
A Synthetic Put is also desired when a specific put option may not be available.
The use of a call option in a short selling strategy helps to minimize the risk of substantial losses that can arise.
In addition, be aware that should the call option expire prior to the stock moving down to where you want it, you could simply buy another call option to maintain the hedge.
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