Buying / Selling Protection - Interested in buying and selling
Hi - I'm interested in the idea of buying and selling protection and in particular what this means.
I understand what buying protection would mean (and correct me if I'm wrong) and this would be depending on what you're looking to hedge, buying way out of the money options. If you're looking to protection against bond or equity market crashes you'd buy way out of the money put options and if you're looking to hedge against inflation you may buy way out of the money call options on commodities or put options on bonds. I could be wrong on this so if anyone can help me on this I'd appreciate it.
However, what would selling protection mean and how does an investor do this? How would, and I'm thinking specifically about an institutional investor such as a pension fund be a seller of protection? Would they do this by selling at the money options? Would they do this through investing into a hedge fund that sells protection, if so, what is the strategy of such a hedge fund? And can anyone give me an examples?
You don't need to invest in a hedge fund to sell protection. You can write options through your brokerage account. I don't really understand your question though. What are you asking? Someone who wants to sell protection just calls their broker and says "I want to write x calls on XYZ stuck at $W." The broker then gives them a price and they take it. . . or leave it. It's the opposite trade of the guy who's buying protecton.
I'm asking as I've been speaking with a small pension fund (long story) and they said they want to be "sellers" rather than "buyers of protection". The pension fund's investment activities are through investment into external managers ie using a multi manager approach so my question is if they're looking to be seller of protection then how do they do this through investment into external managers?
Seller of protection or seller of vol?
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