Abstract
The risk hedge is created with the purchase of a LEAPS put. If this were the only action, it would set up an insurance put, which eliminates risk below the net basis (strike of the put minus cost of the put). The second part of the risk hedge involves selling a series of extremely short-term puts or calls. Exploiting time decay, the intention is to generate numerous short-term profits as expiration date approaches. This strategy solves the problem of market risk when investors hold equity in their portfolios.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Gilster, J. (1997). Option Pricing Theory: Is ‘Risk-Free’ Hedging Feasible? Financial Management, Volume 26, No. 1, pp. 91–105.
- 2.
Fielitz, B. (1971). On the Random Walk Hypothesis. The American Economist, Volume 15, No. 1, pp. 105–107.
- 3.
Guiso, L., Sapienza, P., & Zingales, L. (2008). Trusting the stock market. The Journal of Finance, Volume 63, No. 6, pp. 2557–2600.
- 4.
Hobbs, R. (2017). Create to learn: Introduction to digital literacy. Hoboken NJ: Wiley-Blackwell, p. 161.
- 5.
Pozen, R. (1978). The purchase of protective puts by financial institutions. Financial Analysts Journal, Volume 34, No. 4, pp. 47–60.
- 6.
Augen, J. (2009). Trading Options at Expiration. Upper Saddle River NJ: Pearson Education, p. 41.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2018 The Author(s)
About this chapter
Cite this chapter
Thomsett, M.C. (2018). Long-Term Market Risk Elimination. In: Options Installment Strategies. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-99864-0_5
Download citation
DOI: https://doi.org/10.1007/978-3-319-99864-0_5
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-99863-3
Online ISBN: 978-3-319-99864-0
eBook Packages: Economics and FinanceEconomics and Finance (R0)