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+Chapter 30: Stock Index Hedging Strategies 543 
+With the futures having been eliminated as a possibility, the investor must now 
+choose which strike to use. Since he will be selling calls and buying puts, and since 
+either strike allows him to synthetically sell the UVX "future" at 178, he should 
+choose the 180 strike. This should be his choice because the 180 calls are out-of-the­
+money and thus less likely to be the object of an early assignment. 
+HEDGING WITH INDEX PUTS 
+Let us now move on to discuss ways of hedging in which a complete hedge is not 
+established, but rather some risk is taken. The main difference between options and 
+futures is that futures lock in a price, while options lock in a worst-case price (at 
+greater cost) but leave room for further profit potential. To see this, consider a long 
+stock portfolio hedged by short futures. In this case, one eliminates his upside profit 
+potential except for positive tracking error. However, if he buys put options instead, 
+he expends money - thereby incurring a greater cost to himself than if he had used 
+futures - but he still has profit potential if the market rallies. 
+One could hedge a long stock portfolio with options by either buying index puts 
+or selling index calls. Buying the puts is generally the more attractive strategy, espe­
+cially if the puts are cheap. In order to properly establish the hedge, it is not only nec­
+essary to adjust the dollars of stock in accordance with the Beta, but the deltas of the 
+options must be taken into account as well. The following example will demonstrate 
+the use of puts to hedge a portfolio of diverse stocks. 
+Example: Assume that an investor has the same portfolio of three stocks that was 
+used in a previous example: 3,000 GOGO, 5,000 UTIL, and 2,000 OIL. He has 
+become somewhat bearish on the market in general and would like to hedge some of 
+his downside risk. However, he decides to use puts for the hedge just in case there is 
+a further rally in the market. 
+The table from the earlier example is reprinted below, showing the adjusted 
+volatilities and capitalizations for each stock in the portfolio. The total adjusted cap­
+italization of the portfolio is $720,000, as before. 
+Adjusted Adjusted 
+Volatility Quantity Capitalization 
+Stock Volatility (Step l) Price Owned (Step 2) 
+GOGO .60 4.00 25 3,000 $300,000 
+UTIL .12 0.80 60 5,000 240,000 
+OIL .30 2.00 45 2,000 180,000 
+Total adjusted capitalization: $720,000 (step 3)