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XJO Puts / Portfolio Insurance

Discussion in 'General Investing Discussion' started by Sacko, 2nd Oct, 2009.

  1. Sacko

    Sacko Well-Known Member

    Joined:
    20th Aug, 2007
    Posts:
    69
    Location:
    Central Coast, NSW
    I'm thinking of using some XJO put options as an extra buffer in case of a correction in the market between now and early November and was hoping somebody give me some pointers as to how many contracts I should buy to protect a $120k portfolio.

    I have a margin loan with around 50% LVR, but want to use the available cash (and some on the side) to participate in the ELD and BRW SPPs, which will take me right up to the buffer limit until the new shares are issued and / or if there is a scale back I get the refund cheque through.

    I'm concerned that if there is a sharp correction whilst my cash buffer is tied up in the SPPs I will get a margin call and don't have enough in my remaining cash reserves / buffer to cover the call. My thinking is that if I buy the right number of XJO put options these will increase in value roughly in line with the market fall and thus will save me from the dreaded call.

    I know that the XJO options settle in cash @ $10 per point, what I'm struggling is to work out how many contracts I will need to buy, any informed comments will be greatly appreciated…
     
  2. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,394
    Location:
    NSW
    "...any informed comments will be greatly appreciated…"

    Ask ... Marc Blecher & Hartley's & 92222787 (option broker).
     
  3. Young Gun

    Young Gun Guest

    the formula is this

    number of index options = Value of portfolio / (Exercise price of option x index multiplier)

    Therefore
    $120,000 / (4600 x 10) = 2.6

    so as you can't buy 0.6 of a contract you'll need to buy 3 and be over protected or 2 and be under protected.

    The Nov XJO 4600 PUT EXP 19/11 is trading about 150 points so you're looking at a cost of $3,000 to $4,500 to protect you're portfolio for 2 months.
     
  4. Sacko

    Sacko Well-Known Member

    Joined:
    20th Aug, 2007
    Posts:
    69
    Location:
    Central Coast, NSW
    Thanks for the formula Young Gun. I'm also thinking I could go out a bit longer time wise (and pay a bit more) which will ensure there is plenty of time left once I have my cash buffer back for me to sell to close the puts in order to recoup a good portion of my outlay (if the put is still out of the money).