Which strategy would effectively cover a client who has shorted a call?

Prepare for the Kaplan SIE Test. Utilize flashcards and multiple-choice questions, each with hints and explanations. Get exam-ready now!

The strategy that effectively covers a client who has shorted a call is to establish a long stock position. When a trader shorts a call option, they have a potential obligation to sell shares at the strike price if the option is exercised. By holding a long position in the underlying stock, the trader is protected against rising stock prices.

If the market price exceeds the strike price, the trader can deliver the shares they own to fulfill the obligation without incurring additional losses from having to purchase shares at a higher market price to cover the call option that has been exercised. This hedging approach effectively neutralizes the risk associated with the short call position by ensuring that the trader has the necessary shares to sell if required. The overall effect is a reduction in potential losses, maintaining a balanced risk profile for the trader's strategy.

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