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Table: How One Hedge Might Work

Personal Business

TABLE: How One Hedge Might Work

Since put options increase in value when stock prices fall, you could protect a

diversified stock portfolio from a sudden market decline by purchasing puts in

the Standard & Poor's 100 Index, known as "OEX."

1 You determine you'll need five put contracts to protect your $250,000

portfolio by using this formula: Divide the stocks' value by the value of the

index* times the underlying number of shares, which is most often 100. The math

in this case: $250,000 divided by (529.59 X 100).

2 You only want the protection for the next two months, so you purchase

contracts that expire in the middle of October. You buy "at the money" puts

at a strike price of 530. They trade at 91/2 points, or $950 per contract, so

you need to shell out $4,750 for this "insurance."

3 Should the market suffer a 10% correction, your portfolio would decline by

$25,000. The puts, at expiration, would be worth 53.67 points per contract,

resulting in a gain of $22,085, or about 88% of your portfolio's losses. If the

stock market fell 20%, the puts would recapture 96% of your losses.

4 If the stock market continues its ascent or remains flat, the options expire

worthless, and you are out the $4,750 you paid for them.

* All prices are as of Aug. 15, 1995


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