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Online when I see people talk about using options to hedge, they always seem to talk about it in the put options sense.

For example you buy a stock expecting it go up, but then just to be safe you buy a put option on so if the stock goes down the only loss you made is the premium you paid.

But what is the point of this, surely a much simpler way would be just to buy a call option. That way the only risk you put is the premium and you also get the same benefits of the stock going up like you would if you were to just buy the stock? Instead of doing the two separate transactions of buying the stock and the put option.

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"Hedging" typically means reducing risk in an existing position, which may be a "natural" position based on the business you're in (e.g. oil companies using futures or options to reduce price risk) or some other exposure that you don't want in your portfolio.

So it is natural to use put options to reduce risk of an existing stock position. Selling calls would also reduce price risk with a different overall risk profile (receive income by giving up upside potential).

But yes, buying a stock and buying a put is equivalent to buying a call. Buying a put when you already have an existing stock position is called a "protective put" since it reduces downside risk.

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  • Maybe a nit-pick on third paragraph. They are the same in that they both have limited downside risk and unlimited upside potential, but they are not equivalent in that the P/L charts will be a bit different.
    – Hart CO
    Dec 5, 2023 at 17:08
  • @HartCO Buying a stock and a put at-the-money is a synthetic call, so it should have the same P/L as a call option at the same strike price.
    – Stan H
    Dec 5, 2023 at 21:52
  • @StanH Similar, but not typically the same. Hedging is also not always done with ATM puts, which would further change P/L compared to a long call.
    – Hart CO
    Dec 6, 2023 at 0:57
  • @HartCO A synthetic call (long stock + ATM put) is mathematically equivalent to an ATM call. Long stock and not-ATM put isn't a synthetic call. But you're right that there's missing information in the OP and answer - it's not clear whether the strategy in question is comparing a synthetic call to a call, or a similar strategy (but not quite a synthetic call).
    – Stan H
    Dec 6, 2023 at 1:48
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    @Hart CO - Long the underlying and a long put is synthetically equivalent to the same series long call at any strike. The differences are relatively minor, especially for the average retail option trader. Any pricing difference between the two at inception would be arbed away by traders and market makers. Dec 6, 2023 at 20:23
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Hedging is when the losses in one position are mitigated by another position. Some examples are put protected long stock, call protected short stock, spreads, strangles, long/short equity pairs, etc.

Put protected long stock is synthetically equivalent to the same series long call (same strike and expiration). Most of the time, it makes more sense to buy the call rather than the long put and stock because the long call has less slippage and fees.

For example you buy a stock expecting it go up, but then just to be safe you buy a put option on so if the stock goes down the only loss you made is the premium you paid.

That is true for in-the-money puts. For out-of-the-money puts, the maximum loss is the put's cost PLUS the distance from the stock's current price down to the strike price.

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