DATE: June 8, 2001

QUESTION:
I want to hedge a \$100,000 portfolio by buying puts on the OEX. How do
I calculate how many puts I need to buy?

The multiplier for the OEX index is \$100. Assuming an OEX index level of 800, this means that one OEX put will protect an \$80,000 portfolio (800 x \$100), assuming that the portfolio moves with the OEX index.

Regardless of the strike price of the put, one option per \$80,000 is the correct number of options (assuming an 800 index level and a portfolio that follows the OEX). If a 750-strike put is chosen, for example, an \$80,000 portfolio will only be protected up to \$75,000 (less the premium paid). Should the portfolio decline in value to \$75,000 when the OEX index drops to a level of 750, the put would protect the portfolio from that index level down.

For a portfolio not evenly divisible by the index, a \$100,000 portfolio and an 800 index level for example, a decision must be made whether to "over insure" or to "under insure." If one put is purchased, then only \$80,000 of the \$100,000 is "protected" by puts. If two puts are purchased, then essentially, \$60,000 extra protection has been purchased.

In addition to regular OEX call and put options, there are also Reduced-Value OEX LEAPS available. These are long-term options with expirations in December 2000 and December 2001. If you are interested in these options, you should be aware of how their contract specifications differ form the regular OEX options. The first difference is the ticker symbol. "OCX" is the root symbol for the December 2000, expiration, and "OAX" is the root symbol for the December 2001, expiration. Second, the underlying index is one-fifth (1/5th) of the OEX. This means that, with the OEX at 800, the OEX reduced-value LEAPS trade on an index of 160 (800 divided by 5).

OCX and OAX options also have a \$100 multiplier, so each of these options protects a \$16,000 portfolio (160x \$100). This means that a portfolio of \$100,000 could be protected with 6 or 7 OCX or OAX puts.