Question

Within option trading, is a box spread a hedging strategy, a speculative strategy or something else? Thanks

Answer 1

Hedging constitutes a strategy that manages the financial and aids its investors in dealing with the impact that could occur downside from the securities traded. It does not help in reducing the risk of money invested rather it helps in mitigating the factor of risk.

Further, the speculation is based on random guess which shows the risk or return that could arise against certain transactions in the future.

Hedging is considered as a strategy for mitigating the risk and offsetting the trading loss that could occur in a large number. Further, it is used by all types of investors either large or small to protect their investment from the risk of downsizing and reducing the impact of cash losses in the trade.

The options are also hedged but it comprises the cost of premium payment. The hedge portfolio is determined by the indices of the market that would closely match the portfolio.

Investors had to determine that the worth it would consider being forfeited on an upside basis. The selling of the call option would be able to minimize the cost of hedging and simultaneously limits the gain. Also, future contracts sold would limit the return.

Further, the call option would be exercised only when the stock price is more than the strike price considering the upside betting while the put option would be exercised only when the strike price is more than the stock price stating the downside betting.

The liquidity of the market affects the price of a security to a greater extent. Research had interpreted that there is a stronger link between the systematic risks of liquidity in pricing the security in the market.