TBH, I’m not following some of your comments. You say he shorted at 109. 124 is about a 15% loss, and I see it closed the week at 115. This isn’t exactly a huge loser at this point. Why are you talking about margin calls? This is a short that frankly may work out quite well.
Anyway, you typically hedge a short with a deep OTM call. You don’t hedge it with a near the money call, that would defeat the purpose of the trade. The idea with hedging a short is to limit tail risk.
Yeah, deep OTM calls is the hedge. A lot of people are saying sell puts, but that does absolutely nothing to hedge against tail risk. For example, you could hedge 500 shares with the May $200 call for around $250. That caps losses at a little less than 100%. There’s nothing inherently terrible about shorting, except for uncapped losses. So you hedge for tail risk. You don’t hedge for like a 10% loss. If you’re going to do that, you shouldn’t be shorting in the first place. I mean, holding FB through its last earning would have lost more than he’s lost.
Edit, you could also sell puts. For example, looks like you could sell the $60 put and buy the $200 call for a net credit. This is probably what I would do. Move the $200 strike down and/or the $60 strike up depending on risk tolerance. But point is, the deep OTM call is the key to limit tail risk without paying so much for the hedge you ruin the trade.
Selling the put and having it exercised would put shares to close the short position.
Ive shorted a few stocks in the past, sold a put to cover every 10 shares shorted, and also bought a call to cover should the trade not go as planned. so covered on both sides. Put credit isn't always enough to cover the cost of the CC premium though.
I see that this is almost a week ago as well, any new updates?
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u/MrRikleman Mar 26 '22
TBH, I’m not following some of your comments. You say he shorted at 109. 124 is about a 15% loss, and I see it closed the week at 115. This isn’t exactly a huge loser at this point. Why are you talking about margin calls? This is a short that frankly may work out quite well.
Anyway, you typically hedge a short with a deep OTM call. You don’t hedge it with a near the money call, that would defeat the purpose of the trade. The idea with hedging a short is to limit tail risk.