A major disadvantage of using call options to hedge a short position is that:
A)hedging increases the risk of loss on the short sale.
B)the option premium and commission reduce profit potential.
C)the price of the stock may go up.
D)None of the above

Question

Quizplus · Accepted Answer

The option premium and commission associated with purchasing call options to hedge a short position reduce the overall profit potential from the trade. This is because these costs represent an upfront expense that must be overcome through favorable movements in the underlying asset's price to realize a profit.

A Major Disadvantage of Using Call Options to Hedge a Short