Which options position provides the best hedge for a short position in a stock?

The best hedge for a short position in a stock is to buy calls, as this provides protection against an increase in the stock's price. When you have a short position, you benefit if the stock price goes down. However, if the stock price rises, you incur losses. By purchasing calls, you can offset some of those potential losses. This is because if the stock price increases significantly, the value of the calls will also increase, allowing you to sell the calls for a profit, which can help to mitigate the losses incurred from the short position.

Buying calls essentially gives the investor the right to purchase shares at a predetermined price, effectively limiting potential losses if the market moves against the short position. It serves as a protective measure, making it a strategic choice.

In contrast, the other options do not provide the same level of protection against rising prices. Selling calls would expose you to unlimited risks if the stock price rises substantially, while buying puts provides a benefit only if the stock price decreases, which does not directly help when the market moves against the short position. Buying index calls may benefit from overall market movements but does not offer specific protection for the underlying short stock position.