Short hedge with stock futures

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Butterfly spreadA four-legged position — one option bought at a low strike, two sold at a middle strike and one bought at a high strike, all of the same expiry — that caps the unlimited loss of a short straddle.
• Covered callHolding the underlying in the cash market and writing a call against it — a way of earning premium income from a holding, at the cost of capping the gain above the strike.
• Long straddleBuying a call and a put at the same strike and the same expiry — a bet that the underlying moves a long way in either direction, with two break-even points and a maximum loss equal to both premiums.
• Long strangleBuying an out-of-the-money call and an out-of-the-money put with the same expiry but different strikes — the cheaper cousin of the straddle, with a wider band of loss between two break-even points.
• Put-call parityThe arbitrage-free relationship binding a European call and put of the same strike and expiry to the spot and the discounted strike: c + X·e^(−rt) = p + S. Deviations create risk-free profit.
• Put-Call RatioPut open interest (or volume) divided by call open interest on the same underlying, read as a contrarian sentiment gauge: below 1 is taken as bearish, above 1 as bullish.