Are your investments falling in value?

When the stock market causes concern for investors, many shareholders start to consider the use of puts. Significant, sometimes abrupt changes in pricing can create considerable uncertainty as to future market conditions. Uncertainty in turn leads to market volatility and the need for an effective means to hedge the risk of adverse price exposure.

What is Hedging?

Hedging investments is simply the transfer of price risk. It is accomplished by establishing equal and offsetting positions in different markets. For example, the purchase of a futures contract put can hedge a portfolio of stocks. The easiest way to understand hedging is to consider it as insurance. When investors hedge, they are insuring themselves against an undesirable price movement in their investment. This doesn’t prevent an undesirable price movement from occurring, but if it does occur and the investor is suitably hedged, the negative impact of the movement is reduced. Examples of hedging can be seen every day. If you purchase auto insurance, you are hedging yourself against vandalism, collision damage, personal injuries, or other undesirable events

How do investors use puts?

The buyer of a put option has the right to sell a futures contract at a specific price on or before the expiration date. S&P Index puts should rise in value if the index falls, depending on the amount of the index move. Any profit made on the puts could be used to offset a potential loss in the S&P portfolio.

What are E-mini S&P 500 Puts?

An E-Mini S&P 500 put option gives the buyer the right to participate as the S&P 500 falls below a predetermined strike price until the option expires. The buyer of an E-Mini S&P 500 put has substantial profit potential in the event of a downturn in the S&P 500. An investor who purchased and is holding a E-Mini S&P 500 put has predetermined, limited financial risk.

Capital Preservation

Experts Say

Sam Zell American Billionaire Businessman and Philanthropist

““The definition of a great investor is someone who starts by understanding the downside. You must make the judgement in advance as to how much downside risk you are willing to take”

Ray Dalio American billionaire investor, hedge fund manager, and philanthropist.

“Makes sure that the probability of the unacceptable (ie the risk of ruin) is nil”

Nassim Taleb Author of the Black Swan

“People find insuring their house a necessity, not something to be judged against a financial strategy, but when it comes to their portfolios, because of the ways things are framed in the press, they don’t look at them in the same way.”

Paul Tudor Jones American billionaire investor, hedge fund manager, and philanthropist.

“The most important rule of trading is to play great defence, not great offense”

financial crisis, stock exchange, trend

Get your Futures and Options Strategy Guide.

Using futures and options whether separately or in combination, can offer countless trading opportunities. The 25 strategies in this publication are not intended to provide a complete guide to every possible trading strategy, but rather a starting point. Whether this guide will provide the best strategies and follow-up steps for you will depend on your knowledge of the market, your risk-carrying ability, and your trading objectives.
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    Chicago Board of Trade
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    Chicago Il 60604
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