Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk, Second Edition

CHAPTER 6

Basic Put Hedging

Nowhere else in the investment world is there anything quite like a put hedge. It is intuitively simple, highly flexible, and can be easily implemented—or unimplemented. Depending on the strike price of the put, the hedge can be implemented in such a way as to provide almost any amount of downside protection on the underlying stock, approaching 100 percent. With a hedging tool so effective, one might expect put hedging to be a standard practice in portfolio management, but that remains far from the case. While a substantial number of institutional managers flood in and out of index puts to protect large portfolios when they sense the markets are unraveling, they seldom utilize puts to hedge individual stocks, relying ...