Question

You are long 300 shares ATVI which you bought at $38. It is now trading at $42. You want to protect your position. What kind of option position would suggest? What about the strike price?

Answer 1

In order to protect your position, you might want to write 3 call options with a strike price above the current price, let's say $45.

When you do that, you will receive premium from writing options and would not have to pay anything to the other party if the stock price at expiry is below $45. However, if the stock goes above $45, then you would have to pay the counterparty the difference between the stock price and $45. On the other side, the value of the portfolio would also have gone up with increase in stock price and you are essentially transferring that profits to the counterparty of the call options contract.