In its simplest options-only form, hedging near options expiry means adding a second leg that offsets part of a current position. An existing long call can be paired with a written call at a higher strike. The premium received lowers what is at risk on the first leg, in exchange for giving up gains beyond the second strike.
Definition and Formula
A hedge, in this narrow sense, is a second leg added to a current position rather than a replacement for it. The existing leg stays open; the new leg changes what the combined position comes to at expiry.
One common combination pairs an existing long call with a written call at a higher strike. Both legs share the same underlying and the same expiry. Before the second leg, the position has no upper bound on its payoff. Its max loss equals the premium already paid. After it, both the max loss and the max profit become fixed numbers.
The premium received for the written leg is what lowers the max loss. Part of what was at risk on the first leg is now covered by the premium taken in on the second. That coverage is not free. Above the higher strike, the written leg’s losses grow at the same rate the long leg’s gains do. So the combined payoff stops rising.
At expiry, both legs are worth only their intrinsic value. The combined payoff then bends only at the two strikes, and runs in straight lines between and beyond them. The same mechanics apply to each leg on its own. The two then combine.
Placing the second leg close to expiry means little time value remains in either premium. Because of this, the figures sit close to settlement arithmetic alone. Placing the same two legs earlier prices the same structure differently.
This page covers one structure only — an existing long call hedged with a written call at a higher strike, both expiring together. Other hedge structures exist, including ones that mix options with the underlying itself, and are not covered here.
Formula: Long P&L = (intrinsic − premium) × quantity · Short P&L = (premium − intrinsic) × quantity · Combined = sum of both legs’ P&L
A Worked Example
| Existing leg | Long 24,300.00 call at 92.25 |
|---|---|
| Added hedge leg | Short 24,500.00 call at 28.50 |
| Lots × lot size (each leg) | 1 × 65 |
| Net premium before hedge (₹) | 5,996.25 |
|---|---|
| Net premium after hedge (₹) | 4,143.75 |
| Maximum loss before hedge (₹) | −5,996.25 |
| Maximum loss after hedge (₹) | −4,143.75 |
| Maximum profit before hedge | No upper bound |
| Maximum profit after hedge (₹) | 8,856.25 |
| Break-even before / after | 24,392.25 / 24,363.75 |
All figures come from the same options profit calculator engine on this site. It runs once on the current leg alone, and once on both legs together.
What This Number Tells You
On this arithmetic, the two net premium figures state how much is paid away if the position expires worthless. The two max-loss figures state the same comparison from the downside.
The max-profit figures state what the written leg gives up on the upside in exchange for the reduction on the downside.
And What It Does Not Tell You
Neither payoff states where the expiry price will land. Both are functions of a price that is not yet known.
The comparison holds for legs of the same expiry, priced at the moment this arithmetic runs. Adding the written leg on a different day, with different time value in each premium, changes both figures.
This page covers one structure — an existing long call and a written call at a higher strike, same expiry. Other hedge structures are not computed here.
Frequently Asked Questions
What makes this a hedge rather than a second, independent position?
It is added on top of a current leg rather than opened on its own. Its purpose here is examined only in terms of what it does to the combined position’s max loss and max profit.
Why does the max loss shrink after the written leg is added?
The premium received on the written leg offsets part of the premium already paid on the long leg. So less is at risk if the position expires worthless.
Why does the max profit stop being unbounded?
Above the written leg’s strike, its losses grow at the same rate the long leg’s gains do. So the combined payoff stops rising past that point.
Does hedging close to expiry price differently from hedging earlier?
Yes. Close to expiry, little time value remains in either premium, so the combined figures sit close to settlement arithmetic alone. Earlier, both premiums carry more time value and price the same structure in a new way.
Can more than two legs be combined this way?
The underlying arithmetic extends to more legs; this page works through the two-leg case only.