Laying a floor with Puts

I am looking at going long some puts (S&P 500) to put a floor in some exising positions. I may look into a collar to defray some cost. I am completely in the dark concerning options outside of the theory learned in the CFA program (level III candidate currently), so please bear with the naive questions. Let’s say I have a 5 million dollar position to hedge. I am not even sure how many options I would need. What is the amount each option contract covers? Since I am going long the put I would be paying 9.2 per contract correct? Strike 750.00 Ticker +SPZOJ Bid 8.60 Ask 9.20 Last 8.70 Change -3.50 Volume 7,971 Open Interest 198,368 Please refrain from the “if you don’t know you should be doing this” stuff. The task has come to me. We are a VERY small shop and don’t usually handle options. Thanks in advance.

someone correct me when i go off the deep end here b/c i haven’t done this stuff in ages, but isn’t the SPX multiplier 100? so $5mm/750 x 100 = 66 or 67 contracts? pricey- 9.2 is offer side, you’d be buying your puts there, so $920 bucks a contract x 67 = $61k and change to lock yourself in for just a few days…

bannis is right. 100x for those contracts and i believe they are cash settle. when we put on hedges for the spx, we’ve just used spy contracts as a proxy as they are more liquid. the spread on those equivalents Mar 75 puts (SZC OW) on the spy are right now .71 x .72. just another alternative if you don’t want to deal with that ridiculous spread.

Check liquidity for the options you’re going for, they are often marginal and you may want to look at OTC’s instead. Also, please bear in mind that premiums are HUGE because of the volatility. Depending on the time you want to have your downside covered, you could consider short calls which generate premiums and cover a big downside nowadays. Perhaps add a far out of the money long call to not miss a steep upward move of the market? All I want to say is that you could look at difference methods as I (purely personal) find options pretty expensive right now.

^ that’d work also, but note the SPY is only 1/10th tracking of the SPX so adjust accordingly on contracts. any way you slice it, pretty expensive protection, but in these markets (and in many things in life), protection is a good thing.

mcpass is right. they are not cheap… you may also want to think about a put spread to offset the cost… buy the 75, sell the 71. (unless you think we are going to 710 on the spx pretty quickly. (3 days) not a recommendation by any means. just alternatives.

mwvt, If it’s a $5mm single position, look for an OTC solution. Using OTC options, it’ll be cheaper (european options) and, assuming you’ll use a collar because puts are going to be very expensive, it will be one contract and you won’t run into the tax issues of two separate contracts. I’d second using SPY options if your underlying isn’t a concentrated position.

More dumb questions: Where would I find the OTC options? Is this going to be a customized solution? I know even less than I thought I did… : (

I’m at a small shop too and go to our custodian - Fidelity. They have a Structured Products Group that will do most of the work for you. I assume most custodians/bd’s have some solution for you.

Great. Thanks for the help. I will see what I can come up with at our custodian.

Also consider the practical side of this in that each of your accounts will need to have options trading ability. You’ll basically have to get signatures (unless you already have) for everyone that you want to hedge. There is also the decision of how much to hedge in the aggregate and at the client level. Add to the cost of the option the commissions (which even if you do a block trade will be filtered down to the account level). I kinda like the idea of selling covered calls, assuming that your clients own SPY and don’t have a lot of “one off” holdings that would make them look different from a typical account.

Your brokers will also have a derivative desk. Bannisja’s calculation seems right. Have fun, I always love looking at these things!

banni, email sent to you.