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It works well if the stock continues moving downward in price, but exposes you to all sorts of pain if the stock reverses. In this case, you would be exposed to a loss from the short sale for all the upside, while the put you sold will only earn you the premium.

Hi Brian,

Oh, most definitely. And thanks for pointing that out.

This is in no way a riskless hedge and you get all the potential of a loss if the shares reverse course and zoom upwards. This should only be done while watching the position very carefully and be willing and able to absorb a relatively small loss while trying to protect against a big loss.

Cheers,
Jim
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