CBOE - Index Option Strategies - Buying Index Puts to Hedge

Calculating Index Contracts to Hedge a Portfolio

Stock prices tend to move in tandem in response to the overall stock market as measured by the S&P 500 Index (SPX). The 500 stocks that comprise the S&P 500 Index represent almost 85% of the stock market value in the United States. Therefore, the index is an excellent reflection of the overall stock market. If an investor owns a portfolio of stocks and is concerned about a near-term downward move in the overall market, purchasing the appropriate SPX put options could be a desirable alternative to hedging each stock individually.

Determining the number of contracts to use to hedge a portfolio is a fairly simple process using the following formula:

via CBOE – Index Option Strategies – Buying Index Puts to Hedge.