Series 3: 4.3.2.1. Short Puts

4.3.2.1. Short Puts

A short put will hedge a short inventory position in the same way as a covered call hedges a long position. An at the money put reduces losses no more than the amount of the option premium, and it caps gains by an amount equal to the premium.

Suppose a U.S. importer contracts for a shipment of pharmaceuticals valued at €400,000 to be delivered in December. The importer expects that that the euro will strengthen against the dollar by a small amount. The cash price for euros is currently $1.12, and the at the money put option is selling at $.02. Expecting the euro to remain relatively constant, the importer elects to earn some additional income by shor