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Chapter 5. Advanced option strategies > Writing options as a hedging strategy

Writing options as a hedging strategy

In the previous chapter, you learned how a company with foreign currency risk could purchase options to hedge this risk. A more sophisticated strategy, however, involves the selling of options to generate additional income.

For example, what if a company needs to buy Japanese Yen and is happy with today's rate of exchange? To generate additional income, the manager could sell at-the-money put options. Let's say the Yen was trading at 88, and the 88 puts for 90 days were priced at 200 points. By selling the puts, the company's account is credited with the premium–in this case $2,500 per option. In effect, the company is saying it is willing to buy Yen from the option buyer at 88. If the value of the Yen rises, the puts remain unexercised at expiration, and the company keeps the entire premium. This is a hedge, in that the money can be used to offset the higher Yen.



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