Buying Index Puts to Hedge Summary

For those investors holding a portfolio of mixed stocks who have unrealized profits to protect, protective index puts might be an appropriate strategy to consider. Purchasing index put options with a given strike price for downside protection can, at least in part, limit any losses on the downside.

When the decision is made to buy index puts, the investor should at first select an index that best tracks the performance of that portfolio and establish a put position with its overlying options. Then the investor considers the value of the portfolio and the current level of the index chosen to determine the number of options to buy, and a put strike price is chosen that provides the degree of downside protection wanted.

Today’s investor has a choice of shorter-term expiration months afforded by regular index option contracts, longer-term expirations available with LEAPS®, as well as multiple strike prices. So no matter an investor’s anticipated target for downside protection, there is most likely a put contract that fits this need.