Series 7 - General Securities Representative Exam

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John owns 1,000 shares of BCD Corp. He is concerned that the next earnings announcement may send the stock lower, but does not want to sell the stock, if possible. He would be willing to sell it the stock at a higher price, however. What is a strategy that John can employ to hedge his existing long position?

Buy BCD calls
Buy BCD OTM Calls
Sell BCD puts
Sell covered BCD calls


John can hedge his position by selling covered calls against it. Buying calls, whether at the money or out-of-the money will only give him more long exposure. Selling puts does not make sense here. By selling the covered calls, John could pocket the premium received. If the stock rose high enough through the strike price of the calls he sold, it would be offset by his stock position