If Joe owns 1000 shares of XYZ, how can he fully hedge this position?

To fully hedge a long position in a stock, an investor can purchase put options on that stock. When Joe owns 1,000 shares of XYZ, he has a direct exposure to the price fluctuations of those shares. By buying put options, he establishes the right to sell his shares at a predetermined price (the strike price of the put option) within a specific timeframe. This protects him against the risk of a decline in the price of the stock.

In this context, each put option typically represents 100 shares. Therefore, to hedge his position of 1,000 shares, Joe would need to buy 10 put options. This would provide him with sufficient coverage in case the stock price falls, ensuring that he can sell his shares at the agreed-upon price regardless of how low the market price drops.

This strategy effectively mitigates the potential loss from the decline in the stock price, making it a sound way to hedge a long stock position.