Short Options and Levels of Risk
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The short side of any installment strategy contains immediate risk. A short position can be exercised, and because of this, traders must take steps to mitigate exercise risk. These steps include levels of moneyness, time to expiration and volatility analysis. The basic short positions include covered calls (for the risk hedge) or uncovered options (for both contingent purchase and risk hedge). The risk in a short call or put relies on status of the underlying and its level of historical volatility; in all cases, these risks are reduced by focusing on extremely short expiration terms.