574 Part V: Index Options and Futures 
tion. He would both sell calls and buy puts with the same striking price in order to 
create the hedge. This is similar to a conversion arbitrage. 
When attempting to hedge the S&P 500, one could use the S&P 500 futures 
options or the S&P 500 cash options, but that would not necessarily present a more 
attractive situation than using the futures. On the other hand, there is not a liquid 
S&P 100 (OEX) futures contract, so that when hedging that contract, one generally 
uses the OEX options. As mentioned earlier, inter-index option spreads between var­
ious indices, including the S&P 100 and 500, will be discussed in the next chapter. 
There is not normally much difference as to which of the two is better at any 
one time. However, since a full option hedge requires two executions (both selling 
the call and buying the put), the futures probably have a slight advantage in that they 
involve only a single execution. 
In order to substitute options for futures in any of the examples in these chap­
ters on indices, one merely has to use the appropriate number of options as com­
pared to the futures. If one were going to sell OEX calls instead of S&P 500 futures, 
he would multiply the futures quantity by 5. Five is the multiple because S&P 500 
futures are worth $250 per point while OEX options are worth $100 per point, and 
because the S&P 500 Index (SPX) trades at twice the price of OEX (OEX split 2-for­
l in November 1997). Thus, if an example calls for the sale of 20 S&P 500 futures, 
then an equivalent hedge with OEX options would require 100 short calls and 100 
long puts. 
One could attempt to create less fully hedged positions by using the options 
instead of the futures. For example, he might buy stocks and just write in-the-money 
calls instead of selling futures. This would create a covered call write. He would still 
use the same techniques to decide how much of each stock to buy, but he would have 
downside risk if he decided not to buy the puts. Such a position would be most attrac­
tive when the calls are very overpriced. 
Similarly, one might try to buy the stocks and buy slightly in-the-money puts 
without selling the calls. This position is a synthetic long call; it would have upside 
profit potential and would lose if the index fell, but would have limited risk. Such a 
position might be established when puts are cheap and calls are expensive. 
TRADING THE TRACKING ERROR 
Another reason that one might sell futures against a portfolio of stocks is to actually 
attempt to capture the tracking error. If one were bullish on oil drilling stocks, for 
example, and expected them to outperform the general market, he might buy sever-