Kavan Choksi UAE Discusses Option Strategies for Hedging Risks

Options are financial instruments whose value is derived from discerning underlying assets like currencies, gold, and stocks. As Kavan Choksi UAE mentions, while options trading may seem a bit complex at first, they do play a critical role in the domain of finance. Options trading is a powerful and versatile tool that can considerably enhance one’s trading strategy. It provides investors with the flexibility to profit in diverse market conditions by hedging against potential losses and leveraging capital in an efficient manner.

Kavan Choksi UAE sheds light on using option strategies for hedging risks

Options are financial derivatives that provide buyers with the right, but not the obligation, to sell or buy an underlying asset at a specified price within a particular period. Options are primarily categorized under two types, call options and put options.

• Call Options: They provide the right to buy the underlying asset at a predetermined price or strike price, prior to the expiration date.
• Put Options: They provide the right to sell the underlying asset at the strike price, prior to the expiration date.

Options are considered to be quite a powerful tool for hedging. With the implementation of appropriate options strategies, investors would be able to protect their gains, limit their losses, and effectively manage their risk exposure.

Here are a few of the popular hedging strategies that utilize options to manage risk:

• Protective put strategy: A protective put strategy involves buying a put option in order to protect a long position in the underlying asset. Such a strategy provides downside protection, as the put option increases in value in case the price of the asset falls. The maximum loss tends to be limited to the difference between the purchase price of the asset and the strike price of the option, plus the option premium. To implement a protective put strategy, one has to buy the underlying asset if it is not already owned, and subsequently purchase a put option with a strike price close to the current market price of the asset.

• Covered call strategy: Such a strategy involves selling a call option against an existing long position in the underlying asset. Covered call strategy provides limited downside protection and generates income from the option premium. The maximum profit tends to be capped at the difference between the purchase price of the asset, and the strike price of the call option, plus the option premium. To implement a covered call strategy, one has to buy the underlying asset if it is not already owned, and then sell a call option with a strike price above the current market price of the asset.

• Collar strategy: A collar strategy combines a covered call and a protective put strategy for the purpose of creating a “collar” around the price of the underlying asset. Such a strategy provides downside protection from the put option and also generates income from the call option premium.

As Kavan Choksi UAE mentions, investors must select an appropriate options hedging strategy based on their investment goals, risk tolerance and market outlook.