Derivatives where invented as an insurance policy, the futures contracts on commodities where the birth of financial derivatives. They were invented so farmers and ranchers could stay in the game. Look if everyone is planting at the same time then everyone is selling at the same time. Calf’s where born in the spring all at the same time (that’s before the feed lot cattle industry was turned in to the corporate monster). The most common way to use an option on equity is to simple buy putts underneath the equity or calls if you are short. To HEDGE RISK IT WORKS BIGTIME, Why more do not do it is beyond me. I would never ever own one share of stock without buying a derivative to insure my position. The problem is the investment communities are ignorant to derivatives why because they are hard work they take studying to understand price and use.
Most brokers’ investors fund managers and others know what derivatives are but they have no clue how to employ them. Simply buy the derivative under the equity it is that simple. Now knowing how to roll them in the proper amount is more complicated but it is a very teachable skill
If you are having problems with this I am available for teaching seminars or contract work. blanchblanch2@gmail.com
ART CULTURE WEALTH INVESTMENT ENVIRONMENT
THE CBOE
The Chicago board of options exchange is where the vast majority of all equity options are traded, it is very important to understand there are only so many options written on each equity. So when you are invested in a large hedge fund it can become too large. If a fund holds a very large position and is committed to hedging that total position his buying will increase premium and will directly affect option pricing.
When a major investor takes a position in a fund or hires a personal manger (which I believe is the major investors only true piece of mind) it is important to understand this said effect. I assumed long before that Maddoff was a fraud, along with others. As I watched their funds grow I knew it was impossible for them to have 100 hedging in place as he said he did. Look if you own so much of an equity you have to buy up the derivative (option putts) to cover. If they were 100 % hedged they would own all available putts then some. And furthermore would push pricing to the point of no effect. If the derivative is overpriced the hedge is too expensive and defeats its own purpose.
Blanchschwarz 10/6/10