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Author: TMFGebinr Big gold star, 5000 posts Old School Fool Supernova Phoenix 1
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Subject: Re: Announcement of upcoming trade Date: 2/4/2014 12:32 PM
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short the stock means - Buying the PUT, correct? ...
net Loss would have been = Cost paid for the PUT + $30 per share ( $230-$200) - correct?


Not quite.

In this particular hedge, short the stock means sell shares short, 100 per short (sold) put contract that is going badly wrong.

Let me put it together with some numbers (without including commissions), showing the cash flows.

Assume stock is at $290 in early July and one sells a single contract of a $230 put expiring in 3 months -- September. Premium received is $10.

Qwikster happens, stock price starts falling in July and accelerates in August, passing $230 in mid-August. If I had sold 100 shares short at $215 in early September "just in case," my position at that time would be short one Sep $230 put, short 100 shares.

The stock price then falls off a cliff so that upon expiration, it is exercised at $230 when shares are trading at $115. The purchased shares are then used to cover (close) the short position.

My total realized position (on a per share basis) at that moment would be, in chronological order:

$ 10 for selling the put
215 for selling a share short
(230) for having to buy the share due to put exercise; deliver the share to cover the short position
-----
($ 5) total net loss

That's the final position. I would have bought shares at $230 that were currently worth $115, so those shares from the put would have a loss of $115. However, having sold the shares short at $215 means with shares at $115, the short positions has a gain of $100.

In other words, all but the first $15 of the put's loss was hedged / covered / protected by the gain in the short stock position. Net that $15 loss against the $10 paid at the beginning and the whole thing ends at a $5 loss.

Hope that makes it clear.

Cheers,
Jim
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