Protective Put for Index Options
Chapters in this video
- 0:00 Carla's $2M portfolio and the 500-put problem
- 1:27 Hedging systematic risk with one index put
- 2:21 European-style, cash-settled vs equity options
- 2:53 Cash settlement and the $100 multiplier
- 3:46 T+1 settlement timeline trap
- 4:19 Contracts-needed formula worked example
- 5:55 Rapid-fire exam recap
What this video covers
- Why a diversified portfolio is hedged with a single broad-based index put (like S&P 500, also known as SPX) instead of buying puts on each underlying stock
- The core distinction between equity options (American-style, physically settled) and broad-based index options (European-style, cash-settled), including zero early assignment risk
- How cash settlement is calculated: (strike price minus index settlement value) times the $100 multiplier
- The T+1 settlement timeline, meaning cash is paid the business day AFTER exercise, not on the exercise date
- The contracts-needed formula: portfolio value divided by (index level times $100 multiplier), and the classic trap of forgetting the multiplier in the denominator
- Why index puts hedge systematic (market) risk only, and do NOT protect against unsystematic (company-specific) risk
- How portfolio beta and correlation affect hedge effectiveness, so an index hedge is approximate rather than exact
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