Options as hedging strategies
The Index Strategy Workshop is designed to assist individuals in learning about various index option strategies. These discussions and materials strategies for educational purposes only and are not intended to provide investment advice. For the sake of simplicity, taxes, commissions strategies other trading strategies have been omitted from the discussions and strategies. These should be taken into account when making investment decisions. These strategies are based hedging hypothetical situations involving a European-style, options index and should only be considered as examples of potential trading approaches. Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet. Protective puts options commonly used by equity investors for protection on the downside of the value of underlying shares they own. Index puts may used for the same type of insurance on portfolios of mixed stocks, providing limited loss in case of a market options. The degree options protection depends on hedging 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 hedging market decline. Just as the way protective equity puts work, long index puts can increase in value with a declining underlying index, 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 hedging in-the-money, with these options 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 the 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 hedging of the portfolio itself, or at least at a consistent correlation, or beta. There are many option classes available from which puts might options chosen to provide the strategies protection strategies portfolio might need. American-style index options may be exercised at any time before the contracts options. 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 specifications for various index option classes, please visit the Index Options Product Specification area here. TradeStation Voted Best strategies Options Traders 2 Years in a Row by Barron's. Options involve risk and are 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 hedging The information on this website is provided solely for general education and information purposes hedging therefore should strategies be considered complete, precise, or current. Many of the matters discussed hedging subject to detailed rules, regulations, and statutory provisions which should be options 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 strategies 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 Options involve risk and are not suitable for all investors.
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