Index Puts Definition

Forex Glossary

Definition

The term catalog put identifies this plan of purchasing a contract to restrict the downside risk of a portfolio of stocks. As is true for protective places, indicator places provide investors using a hedge against a downward economy, while still maintaining unlimited upside potential.

Explanation

An indicator put is definitely an investment plan that includes the purchase of contracts in a indicator that closely monitors the effectiveness of a portfolio of stocks concerning beta. This tactic offers the investor using a hedge against a downward economy, protecting profits or limiting a further reduction in an abrupt reduction. While an indicator group supplies insurance against a bear market, in addition, it gives the buyer with up side possibility in a bull market.

As a reminder, a put (American) provides the owner with the best, however, no obligation, to market the indicator at the strike price anytime prior to the option’s expiration date irrespective how low the stock’s price declines. The cost paid for this set, is supposedly the buyer ‘s insurance premium. In the event the importance of this indicator rises, the investor benefits from the profit from the value in these portfolio and doesn’t exercise their option. In the event the importance of this indicator declines, the buyer gets the option of attempting to sell the indicator at the strike price of this in-the-money put to cancel the loss at the price of these portfolio.

Example

An investor possesses a portfolio of tech stocks worth $500,000 that very closely match the effectiveness of the NASDAQ 100 Index. The existing value of this NASDAQ 100 is right approximately $5,000, therefore 1 put option will cover $5,000 x100 multiplier for its indicator, approximately $500,000 of this portfolio; hence, just a single contract will be necessary.

The price of the insurance having a strike price of $4,950 is $35.00, this means that the investor would need to cover $35.00 x100 $3,500 with this particular three-month indicator put. If the Cost of this NASDAQ 100 rises to $5,100, the worth of this investor’s profit will be:

= Ending Value of Portfolio – Starting Value of Portfolio – Cost of Index Put
= 510,000 – $500,000 -$3,500, or
= 10,000 – $3,500$6,500

If the Cost of this NASDAQ 100 dropped into $4,900, and also the investor didn’t Buy the indicator set the investor’s reduction would be:

= Ending Value of Portfolio – Starting Value of Portfolio
= 490,000 – $500,000, or $10,000

If the Cost of this NASDAQ 100 dropped to $4,900, and also the investor exercised their place at $4,950the investor’s reduction would be:

= Ending Value of Portfolio – Starting Value of Portfolio – Cost of Index Put Profit Index Put
= 490,000 – $500,000 – $3,500 $50 X100, or
= 490,000 – $500,000 – $3,500 $5,000, or
= -$10,000 -$3,500 $5,000$8,500

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