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+Cbapter 30: Stock Index Hedging Strategies 577 
+that leads the investor to believe that the group no longer has the potential to out­
+perform the market. 
+If the futures are underpriced when one begins to investigate this strategy, he 
+should not establish the position. What is gained in tracking error could be lost in 
+theoretical value of the futures. Since one is establishing both sides of the hedge 
+(stocks and futures) at essentially the same time, he can afford to wait until the 
+futures are attractively priced. This is not to say that the futures must be overpriced 
+when the position is established, although that fact would be an enhancement to the 
+position. 
+If one thinks that a particular group will underperform the market, he merely 
+needs to decide how many shares of each stock to sell short and then can determine 
+how many futures to buy against the short sales in order to try to capture the track­
+ing error. If one decides to capture the negative tracking error in this manner, he 
+must be careful not to buy overpriced futures. Rather, he should wait for the futures 
+to be near fair value in order to establish the position. 
+COLLATERAL REQUIREMENTS 
+In any of the portfolio hedging strategies that we have discussed in this section, there 
+is no reduction in margin requirements for either the futures or the options. That is, 
+the stocks must be paid for in full or margined as if they had no protection against 
+them, and the hedging security - the futures or options - must be margined fully as 
+well. Long puts would have to be paid for in full, short futures would require their 
+normal margin and would be marked to the market via variation margin, and short 
+calls would have to be margined as naked and would also be marked to the market. 
+A trader who has not margined his stocks could use them as collateral for the naked 
+call requirements if he so desired. 
+SUMMARY 
+There have been two major impacts of index futures and options. One is that they 
+allow a trader to "buy the market" without having to select individual stocks. This is 
+important because many traders have some idea of the direction in which the mar­
+ket is heading, but may not be able to pick individual stocks well. The other, perhaps 
+more major, impact is that large holders of stocks can now hedge their portfolios 
+without nearly as much difficulty. The use of these futures and options against actu­
+al stock indices - real or simulated has introduced a strategy into the marketplace 
+that did not previously exist. The versatility of these derivative securities is evidenced