S64 Part V: Index Options and Futures 
However, the concept is still a valid one, and it is now generally being practiced 
with the purchase of put options. The futures strategy was, in theory, superior to buy­
ing puts because the portfolio manager was supposed to be able to collect the pre­
mium from selling the futures. However, its breakdown came during the crash in that 
it was impossible to buy the insurance when it was most needed - similar to attempt­
ing to buy fire insurance while your house is burning down. 
Currently, the portfolio manager buys puts to protect his portfolio. Many of 
these puts are bought directly over-the-counter from major banks or brokerage hous­
es, for they can be tailored directly to the portfolio manager's liking. This practice 
concerns regulators somewhat, because the major banks and brokerage houses that 
are selling the puts are taking some risk, of course. They hedge the sales (with futures 
or other puts), but regulators are concerned that, if another crash occurred, it would 
be the writers of these puts who would be in the market selling futures. in a mad fren­
zy to protect their short put positions. Hopefully, the put sellers will be able to hedge 
their positions properly without disturbing the stock market to any great degree. 
IMPACT AT EXPIRATION - THE RUSH TO EXIT 
Some traders persist in attempting to get out of their positions on the last day, at the 
last minute. These traders are not normally professional arbitrageurs, but institu­
tional clients who are large enough to practice market basket hedging. Moreover, 
they have positions in indices whose options expire at the close of trading (OEX, for 
example). If these hedgers have stock to sell, what generally happens is that some 
traders begin to sell before the close, figuring they will get better prices by beating 
the crowd to the exit. Thus, about an hour before the close, the market may begin to 
drift down and then accelerate as the closing bell draws nearer. Finally, right on the 
bell that announces the end of trading for the day, whatever stock has not yet been 
sold will be sold on blocks - normally significantly lower than the previous last sale. 
These depressed sales will make the index decline in price dramatically at the last 
minute, when there is no longer an opportunity to trade against it. 
These blocks are often purchased by large trading houses that advance their 
own capital to take the hedgers out of their positions. The hedgers are generally cus­
tomers of the block trading houses. Normally, on Monday, the market will rebound 
somewhat and these blocks of stock can be sold back into the market at a profit. 
Whatever happens on Monday, though, is of little solace to the trader trapped 
in the aftermath of the Friday action. For example, if one happened to be short puts 
and the index was near the strike as the close of trading was drawing near on Friday 
afternoon, he might decide to do nothing and merely allow the puts to expire, figur­
ing that he would buy them back for a small cost when he was assigned at expiration.