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.