Lets say you think the stock is near a high and more likely to fall than rise. How can you efficiently lock in profits and change to the bearish side?
Many investors would sell the $50 call for $7 and realize a $5 profit, then use $1.25 of this profit to purchase the $50 put. This makes them long the $50 put for a net credit of $3.75. It is a nice hedge, as a guaranteed return has been locked in, but there is a more efficient way. Calls Are Puts (And Puts Are Calls) One of the simplest ways to hedge this position is to understanding that calls are puts and puts are calls it just depends on how they’re matched with the underlying stock. For example, if you are long a call, you can turn it into a long put by shorting the stock. Similarly, if you are long a put and buy the stock, you are effectively long a call. In either case, the profit and loss diagram will be reversed. But if we short stock at $50, Now the position behaves like a put option and makes money if the stock falls, but it maintains a limited loss to the upside of $2. That’s because we can always purchase the stock for $50 with the call option and cover our short position.
