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training_data/curated/text/0d60963eda4747e28f7441ac34b984c286c0589f095042dd0fbc3bf63155f7ba.txt

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+614 Part V: Index Options and Futurei 
+retical cash value. He is not too eager to sell at such a discount, but he realizes tha 
+he has a lot of exposure between the current price and the guarantee price of 10. 
+He might consider writing a listed call against his position. That would conver 
+it into the equivalent of a bull spread, since he already holds the equivalent of a lonf 
+call via ownership of the structured product. Suppose that he quotes the $SP) 
+options that trade on the CBOE and finds the following prices for 6-month options 
+expiring in December: 
+$SPX: 1,200 
+Option 
+December 1,200 call 
+December 1,250 call 
+December 1,300 call 
+Price 
+85 
+62 
+43 
+Suppose that he likes the sale of the December 1,250 call for 62 points. How 
+many should he sell against his position in order to have a proper hedge? 
+First, one must compute a multiplier that indicates how many shares of the 
+structured product are equivalent to one "share" of the $SPX. That is done in the 
+simple case by dividing the striking price by the guarantee price: 
+Multiplier = Striking price/ Base price 
+= 700 / 10 = 70 
+This means that buying 70 shares of the structured product is equivalent to 
+being long one share of $SPX. To verify this, suppose that one had bought 70 shares 
+of the structured product initially at a price of 10, when $SPX was at 700. Later, 
+assume that $SPX doubles to 1,400. With the simple structure of this product, which 
+has a 100% participation rate and no adjustment factor, it should also double to 20. 
+So 70 shares bought at 10 and sold at 20 would produce a profit of $700. As for $SPX, 
+one "share" bought at 700 and later sold at 1,400 would also yield a profit of $700. 
+This verifies that the 70-to-l ratio is the correct multiplier. 
+This multiplier can then be used to figure out the current equivalent structured 
+product position in terms of $SPX. Recall that the investor had bought 15,000 shares 
+initially. Since the multiplier is 70-to-l, these 15,000 shares are equivalent to: 
+$SPX equivalent shares = Shares of structured product held/ Multiplier 
+= 15,000 / 70 = 214.29 
+That is, owning this structured product is the equivalent of owning 214+ shares 
+of $SPX at current prices. Since an $SPX call option is an option on 100 "shares" of 
+$SPX, one would write 2 calls (rounding off) against his structured profit position. 
+Since the SPX December 1,250 calls are selling for 62, that would bring in $12,400 
+less commissions.