37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
Chapter 30: Stock Index Hedging Strategies 545
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In this case, the number of puts is determined by using the same formula as in
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the above example and then also dividing by the absolute value of the delta:
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Puts to buy = $720,000 / (100 X 180) / 0.60
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= 67
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Cost of protection: 67 x $450 = $30,150
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In this case, the portfolio manager is spending much more for the puts, but for
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his additional expense, he acquires immediate protection for his portfolio.
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Furthermore, there is some intrinsic value to the puts he bought (2 points, or $13,400
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on 67 of them). If the UVX Index drops at all, these puts will immediately begin to
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hedge his entire portfolio against loss. Of course, if the market rises, he loses his
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much more expensive insurance cost.
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When one uses options instead of futures to hedge his position, he must make
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adjustments when the deltas of the options change. This was not the case when futures
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were used; perhaps with futures, one might recalculate the adjusted capitalization of
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the portfolio occasionally, but that would not be expected to affect the quantity of
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futures to any great degree. With put options, however, the changing delta can make
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the position delta short when the market declines, or can make it delta long if the mar
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ket rises. This situation is akin to being long a straddle the position becomes delta
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short as the market declines and becomes delta long as the market rises.
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Basically, the adjustments would be same as those that a long straddle holder
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would make. If the market rallied, the position would be delta long because the delta
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of the puts would have shrunk and they would not be providing the portfolio with as
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much adjusted dollar protection as it needs. The investor might roll the puts up to a
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higher strike, a move that essentially locks in some of his stock profits. Alternatively,
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he could buy more puts at the current (low) strike to increase his protection.
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Conversely, if the market had declined immediately after the position was
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established, the investor will find himself delta short. The delta of the long puts will
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have increased and there will actually be too much protection in place. His adjust
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ment alternatives are still the same as those of a long straddle holder - he might sell
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some of the puts and thereby take a profit on them while still providing the required
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protection for the stock portfolio. Also, he might roll the puts down to a lower strike,
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although that is a less desirable alternative.
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HEDGING WITH INDEX CALLS
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Another strategy to protect a stock portfolio is to establish a ratio write using short
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calls against the long stock. This is the opposite of using puts for protection, in that
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it is more equivalent to being short a straddle. |