Buying Index Puts to Hedge

Introduction
Example
Close Below Strike Price
Close Between Strike and Break-Even
Close Above Break-Even
Calculate Contracts to Hedge
Summary

Index XYZ is above the break-even point at expiration

XYZ Index at 100
Buy 200 XYZ 96 Puts at $0.75

If at expiration index XYZ closes at a level of 100.75, and with the portfolio value at $2,015,000, the $15,000 total cost of the puts has been covered. Above this level the investor is positioned for potential profits which are theoretically unlimited as long as index XYZ continues to increase.