Hedging options refers to the application of two option trades or a combination of option and futures trades. Hedging options can generally be divided into option-to-option hedging and option-to-futures hedging transactions.
Example analysis of a hedging transaction between options and options
An option-option hedging transaction is where an investor purchases a call option on a composite stock index and at the same time buys a put-discriminating contract on that composite stock index, using the profit from one option to compensate for the loss from the other.
For example, an investor in January 1993 purchased a call option on the New York Stock Exchange composite stock index expiring in June at an agreed price of 150, two months later. The price of the stock index futures contract rises to 165, at which point the investor's net income is (165-150)*500
= $7,500 and the premium points are 10.5, which would result in a premium of 10.5 * 500 = $5,250. As the option does not expire until June, its profit will increase if the stock market continues to be positive. However, the stock market is fickle and can go up as well as down. In this case... For this investment, it would be a foregone conclusion. Therefore, the investor purchases a put option on the New York Stock Exchange Composite Stock Index futures contract expiring in June in March. Assuming that the premium points for the June expiry put option in March is 15.5 points, the premium would be 15.5*500 = $7,750.
By June the following two scenarios may occur: either the index continues to rise, say to 180 points, then the investor makes a profit by exercising his call option of (180-150)*500 = US$15,000. Less the premium of the call option of US$5,250. The net profit is $9,750. By: plant the investor also purchased a put option in March, when the stock market continues to rise, it can be allowed to expire null and void, but the cost of purchasing this put option is deducted from the winnings, i.e., $9750 - $7750 = $2000, the investor's actual winnings are $2000. The second scenario is that the stock market reverses its decline from March onwards, then the investor's loss on the call option can be made up by exercising the put option.
Example analysis of options and futures contracts hedging transactions
An option and futures contract hedging transaction is where an investor purchases a put option at the same time as a stock index futures contract. If there is a bearish market, he can use the profits from the put option to compensate for the losses in the stock index futures contract; if there is a bullish market, he will not exercise the put option and lose his premium, but can compensate for the loss of the put The loss of the option fee.
For example, an investor expects the stock market to be bullish and purchases a stock index futures contract expiring in June in March 1993. If the stock market does rise in June, the investor will have made a profit from the increase in points. However, the stock market can suddenly fall before the contract expires. The investor's losses would then be substantial. A prudent investor would not normally take this risk and would buy a financial futures market overview put option when buying a stock index futures contract. In the event of a downturn in the stock market, he will be able to make up for his losses from trading in the stock index futures contract with the profits earned from the put option. Of course, if the stock market is bullish, the investor will not exercise the put option and then deduct the cost of buying the put option from the profit on the stock index futures contract, thus keeping the investment within a certain level of risk to maximize profits.
