Using Options to Hedge Equity Portfolios
The primary objective of equity hedging programs is reducing the impact market decline has on equity portfolios. All options-based hedging strategies have costs that are either explicit in the form of up-front premium payments or implicit in the form of reduced exposure to favorable markets. In the short term, it’s possible for hedged equity portfolios to outperform unhedged equity portfolios due to market decline. However, investors can expect the total return of hedged equity portfolios to trail those of unhedged equity portfolios over the long term.
The concept of equity hedging is straightforward, but structuring and implementing equity hedging programs can be rather involved. This paper intends to help investors navigate the process with respect to the design and implementation of equity hedging programs that fit their specific goals and objectives.