Question

On your own version, explain the motivations behind options hedging. Expand your explanation through various types of options hedging strategies that are available to reduce options hedging costs while able to maximize profit. (limit your answer to be within 500 words)

Answer 1

Option hedging is done produced a risk associated with option buying or selling. Options are very volatile securities, hence to reduce the volatility of the instrument option is brought and sold at the same time at different strike prices or same strike price with a calendar Spread.

The expiration of the buy and sell position can be the same expiry or a calendar expiry.

The motivation is the limit the risk associated with options trading, it in turn also reduces the return.

Various option trading strategies used for hedging are:

1. Iron Condor:

Here call option is brought and sold +

A put option is brought and sold.

2. Butterfly:

In this strategy: 2 call options a brought at different strike prices in both sides and 2 call options are sold at the centre.

The strategies are available to reduce option hedging cost by reducing the span margin and are able to maximise profits.

Option hedging is mainly required and recommended, while option selling.