Question
The writer(seller) of a European stock option receives a premium from the buyer up front, but at the option's maturity T the writer faces a
The writer(seller) of a European stock option receives a premium from the buyer up front, but at the option's maturity T the writer faces a possible financial liability. (settled in cash at maturity)
In principle, what can the writer do in order to hedge herself against this unknown cashflow she has to pay at maturity T (in case of a call and put option, respectively)? Choose all correct statements.
A. When selling a call option the writer can try to partially offset her financial liability at maturity T by entering into a long position in the underlying stock.
B. When selling a call option the writer can try to partially offset her financial liability at maturity T by entering into a short position in the underlying stock.
C. When selling a put option the writer can try to partially offset her financial liability at maturity T by entering into a long position in the underlying stock.
D. When selling a put option the writer can try to partially offset her financial liability at maturity T by entering into a short position in the underlying stock.
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