← AdvancedLesson 24 · 5:29
Hedging a portfolio against a crash
Summary
You can compare four ways to protect a share portfolio against a crash: protective puts, a put spread, a collar and index puts sized by beta. You can weigh each one's yearly cost against what it saved, and name the ways a hedge can fail you.
Key terms
- protective put
- Owning shares and buying a put on those same shares to put a floor under the loss.
- collar
- Owning shares while buying a put below the price for a floor and selling a call above it for a ceiling.
- beta
- How much a stock tends to move for each move in the index, measured from the past.
- index puts
- Puts on an index such as SPX or XSP used to protect shares, which only work if the shares follow the index.
Check yourself
Answer each question to see why the right answer is right.
1. You own 1,000 XYZ shares at $100 and buy 10 $90 puts for $2,810. In the drawn crash XYZ falls to $76. What do you lose?
2. You buy the $90 puts and sell $80 puts, for $1,520. What happens in a crash deeper than $80?
3. You buy the $90 puts and sell $110 calls. Why is this collar not free?
4. In the example, when the index moves 10%, XYZ tends to move 12%. How much index does your $100,000 of XYZ act like?
5. XYZ falls 24% on its own bad news while the index does not move. What happens with the index puts?
Finished the video and the quiz? .