Options and Futures were originally intended to function as insurance policies. They enable market participants to transfer part or all of the risk associated with holding a position in the underlying instrument from one party to another. To hedge short underlying position with options To hedge long underlying position with options Buy call Sell call Sell put Buy put Buy call spread Sell call spread Sell put spread Buy put spread Buy semi-futures Sell semi-futures

Note: ATM or At-the-money: Option whose exercise price is the same as the market price of the underlying asset. ITM or In-the-money: a call is said to be "in-the-money" when the value of the underlying instrument is greater than the option strike price. A put is "in-the-money" when its strike price is greater than the value of the underlying instrument. OTM or Out-of-the-money: a call is "out-of-the-money" when the value of the underlying instrument is less than the option strike price. A put is "out-of-the-money" when its strike price is less than the value of the underlying instrument.

To hedge short underlying position with options   Anticipations Characteristics Short call Implied volatility down Limited profit - Unlimited loss - Limited protection - Cash credit - Risk profile at expiration equivalent to a short put. Long put Implied volatility up Unlimited profit - Limited loss - Unlimited protection - Important cost - Risk profile at expiration equivalent to a long call. Short semi-futures Implied volatility direction depends on the strikes: Buy put and sell call with a higher strike If a rise in implied volatility is expected: sell 1*OTM call / buy 1*ATM put If a fall in implied volatility is expected: sell 1*ATM call / buy 1*OTM put Limited profit - Limited loss - Unlimited protection - Low cost - Risk profile at expiration equivalent to a long fence or a bull spread. short call spread or bull spread Implied volatility direction depends on the strikes: Sell call and buy call with higher strike If a rise in implied volatility is expected: 1*buy ATM call / sell 1*ITM call If a fall in implied volatility is expected: buy 1*OTM call / sell 1*ATM call Unlimited profit - Unlimited loss - Limited protection - Low cost - Risk profile at expiration equivalent to a long semi-futures. Long put spread or bear spread Implied volatility direction depends on the strikes: Sell put and buy put with higher strike If a rise in implied volatility is expected: buy 1*ATM put / sell 1*OTM put If a fall in implied volatility is expected: buy 1*ITM put / sell 1* ATM put Unlimited profit - Unlimited loss - Limited protection - Low cost - Risk profile at expiration equivalent to a long semi-futures. To hedge long underlying position with options   Anticipations Characteristics Short call Implied volatility down Limited profit - Unlimited loss - Limited protection - Cash credit - Risk profile at expiration equivalent to a short put. Long put Implied volatility up Unlimited profit - Limited loss - Unlimited protection - Important cost - Risk profile at expiration equivalent to a long call. Short semi-futures Implied volatility direction depends on the strikes: Buy put and sell call with a higher strike If a rise in implied volatility is expected: sell 1*OTM call / buy 1*ATM put If a fall in implied volatility is expected: sell 1*ATM call / buy 1*OTM put Limited profit - Limited loss - Unlimited protection - Low cost - Risk profile at expiration equivalent to a long fence or a bull spread. short call spread or bull spread Implied volatility direction depends on the strikes: Sell call and buy call with higher strike If a rise in implied volatility is expected: 1*buy ATM call / sell 1*ITM call If a fall in implied volatility is expected: buy 1*OTM call / sell 1*ATM call Unlimited profit - Unlimited loss - Limited protection - Low cost - Risk profile at expiration equivalent to a long semi-futures. Long put spread or bear spread Implied volatility direction depends on the strikes: Sell put and buy put with higher strike If a rise in implied volatility is expected: buy 1*ATM put / sell 1*OTM put If a fall in implied volatility is expected: buy 1*ITM put / sell 1* ATM put Unlimited profit - Unlimited loss - Limited protection - Low cost - Risk profile at expiration equivalent to a long semi-futures.