Question

You want to invest in TSLA but have concern about if the stock is too much overvalued. How can you hedge your risk if you buy 10 shares of TSLA at $780 per each share? Explain.

Answer 1

Overvalued stock may decline in value any time. Hedging is through either short sale or by buying put option.

If you are confident about decline in price then short sale is better as you can sell the stock today for 780 and have the option to buy it back at a later date at spot price on expiration.

If put option is bought then you have the option to sell the stock at strike price. If stock price increases then you need to sell the stock but if price declines then you have the option to sell the stock at strike price of the option.