Instructions

Determine which stock index most accurately reflects the composition of your stock portfolio. The NASDAQ-100 is primarily technology stocks; the Dow Jones Industrial Average is composed of large blue-chip stocks; and the S&P 500 provides broad coverage of the majority of U.S. stocks. Put options (the right to sell the underlying security for a set price) on these three indexes are usually used for option portfolio insurance purposes. Put options on indexes will increase in value as the index declines.

Determine an appropriate strike price for the put-option contracts. If the chosen stock market index falls below the strike price, the put options will be in-the-money, increasing in value as the index value falls. Options with a strike price near the current value of the index are at-the-money and will start generating immediate profits to offset losses in the stock portfolio if the market moves downward. Options that are further out-of-the-money will cost less than at-the-money contracts but will provide less return if the stock market does decline.

References

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