Martin purchased 20 ABC calls. What position is he trying to hedge?

When Martin purchases 20 ABC call options, he is looking to hedge against a short position in the underlying shares of the stock, which in this case is ABC. Each call option typically represents the right to purchase 100 shares of the underlying stock. Therefore, owning 20 call options gives him the right to buy 2000 shares (20 contracts multiplied by 100 shares per contract).

If Martin is holding a short position of 2000 shares of ABC, purchasing the calls provides him with a way to mitigate the risk associated with that short position. If the price of ABC rises, the value of his calls will increase, allowing him to buy the shares at the call option's strike price rather than the current market price. Thus, if his short position incurs losses from the rising stock price, the gains from the call options can offset those losses.

The other options do not represent the position Martin is hedging against as effectively. For instance, being long 20 ABC convertible bonds or long 2000 shares does not create a need for hedging with calls; in fact, it would suggest a bullish outlook rather than a bearish one that would necessitate a hedge. Similarly, shorting 1000 shares does not match the scale of Martin