Hedging strategy with options
The Index Strategy Workshop is designed to assist individuals in learning about various index option strategies. These discussions and materials are for educational purposes only and are not with to provide investment advice. For the sake of simplicity, taxes, commissions and other trading costs have been omitted from the discussions and strategies. These should be taken into account options making investment decisions. These strategies are based on hypothetical situations involving a European-style, cash-settled index and should only be considered as examples of potential trading approaches. Access to, or hedging of a copy of, the Options Disclosure Document must accompany this worksheet. Protective puts are commonly used by equity investors for protection on the downside of the value of underlying shares with own. Index puts may used for the same type of insurance on portfolios with mixed stocks, providing limited loss in case of a market decline. The degree of protection depends on the put strike price selected. As the index goes down, the value of the protective puts can increase, with profits on the options at least partially offsetting any losses seen in the value of the portfolio. Index puts can be a very useful hedge to protect the value of a portfolio of mixed stocks in case of a market decline. Just as the way protective equity puts work, long index puts can increase in value with a declining underlying strategy, the degree to which depending on the put strike price chosen. Potential profits on the puts can be realized by either selling the contracts or exercising them if in-the-money, with these gains at least partially offsetting any decline in portfolio value. The puts limit the portfolio loss to a specific level depending on their strike price in relation to the underlying index level when hedging protective option position is established. The break-even point on the upside will be the current portfolio value when it is insured plus the cost of the puts. The index option class chosen should have an underlying index that very closely tracks the performance of the portfolio itself, or at least at a consistent correlation, or beta. There are many option classes available from which puts might be chosen to provide the downside protection a portfolio might need. American-style index options may be exercised at any time before the contracts expire. European-style index options may be exercised only within a specific period of time, generally on the last business day before expiration. All index options are cash-settled. For contract options for various index option classes, please visit the Index Options Product Specification area here. TradeStation Voted Best for Options Traders 2 Years in a Row by Barron's. Options involve risk and strategy not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options ODD. Copies of the ODD are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, SuiteChicago, Illinois The information on hedging website is provided solely for general education and information purposes and therefore should not options considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions. My Account Account Settings Sign Out. Index Option Strategies - Buying Index Puts to Hedge the Value of a Portfolio. CBOE Links Government Relations Investor Relations CBOE Livevol Data Shop Livevol CBOE Media Hub System Status Chinese Language Site Risk Management Conference Careers Advertise with CBOE CBOE. Other CBOE Sites CBOE Futures Exchange C2 Exchange Trading Permit Holders. CBOE Strategy involve risk and are not suitable for all investors.
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Consider first the macroeconomic performance of the US economy.
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