Options and Futures: New Route to Risk Return Management - download pdf or read online

By Donald E. Fischer, Darwin M. Bayston, Robert W. Kopprasch, H. Nicholas Hanson, Sumber Abramson, Robert E. Shultz and Paul H. Fullum, Lloyd McAdams, Patricia A. Owens, David M. Dunford, Roger F. Murray

ISBN-10: 0870946102

ISBN-13: 9780870946103

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Extra resources for Options and Futures: New Route to Risk Return Management

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This is an example of hands-on portfolio management in the options area. Due to the risk transference capabilities, a lot of money will be put into straight buywrite programs in the future, especially if the bond market picks up again. Another possibility is to work out a good method for buying stocks and selling options on those stocks to achieve specific risk-reward relationships. This is like setting up a bond substitute program, and such programs are in fact being set up today. A basic goal of a buy-write program is to outperform the S&P 500 by a percent or two per year, with only about twothirds the "index" volatility.

30 The easiest way to understand the insurance that relates to options is to think of yourself high at the top of a wonderful market rise. For one reason or another you don't want to sell your stocks, but you think the market is going to go down. Obviously, buying put options is going to help. Buying the option has an advantage over selling the futures: if you're wrong about the direction of the market and it keeps on running up, you are going to lose your insurance policy (the puts), but you will still have your portfolio working for you.

It is appropriate to consider being somewhere in between 100% hedged and 0% hedged. You may want to eliminate some of your risks, but not necessarily all of them. It's a judgment call. Basis Risk and Convergence From a theoretical point of view, each of these approaches sounds like something that should be done. But, they're not all that straightforward there are catches. The first thing to remember about a hedge, especially in the futures market, is that you don't totally eliminate risk from a portfolio when you hedge it.

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Options and Futures: New Route to Risk Return Management by Donald E. Fischer, Darwin M. Bayston, Robert W. Kopprasch, H. Nicholas Hanson, Sumber Abramson, Robert E. Shultz and Paul H. Fullum, Lloyd McAdams, Patricia A. Owens, David M. Dunford, Roger F. Murray


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