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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: skinowski who wrote (111939)	10/15/2008 9:10:26 PM
From: Q8	Read Replies (1) \| Respond to of 206214

Not really. Hope this helps..sorry about the format... Got my Devil's Alernative by Forsyth today.. Hard cover of course..else my eyes.. yes getting old... HEDGING EQUITY PORTFOLIOS: PROTECTIVE PUTS VERSUS COVERED CALLS William G. Droms, Georgetown University Exchange-traded puts and calls may be used to hedge equity portfolios against fluctuations i n principal value by constructing covered call or protective p u t portfolios. A covered call is the sale of a call option against a stock held i n a portfolio. A protective put i s the purchase of a put option on a stock held i n a portfolio. From the inception of p u t trading on the organized exchanges i n July 1977 through the end of January 1982, the rate of return on a hedged stock portfolio using protective puts on the f i r s t twenty-five stocks for which puts were available would have been significantly higher than that earned on an unhedged portfolio consisting of the same securities (the underlying portfolio). The annual compound rate of return on the protective put portfolio, net of comnissions, was 11.48 percent, compared to 9.62 percent for the underlying portfolio and 8.86 percent for the S&P 500. The July 1977 to January 1982 period could be characterized as a bear market i n that although S&P 500 returns were positive they nevertheless trailed 90-day Treasury bills. During the more favorable market period of 1979-80, the p u t portfolio increased 54.7 percent versus 90.0 percent for the underlying portfolio and 55.7 percent for the S&P 500. During the sharp market rally of April to November 1980, protective puts returned 33.8 percent versus 59.4 percent for the S&P 500. The cost of put "insurance" can thus be as high as 20 percent per year. Increased returns were accompanied by decreased risk as measured by volatility. The beta of the protective put portfolio was 0.51 compared to 1.13 for the underlying portfolio. The protective put portfolio substant i a l ly outperformed the underlying portfolio on a risk-adjusted basis. A covered call portfolio consisting of the same twenty-five stocks provided a significantly lower rate of return than the underlying portfolio. The covered call portfolio, net of comnissions, returned only 6.90 percent. The covered call portfolio also provided substantially less risk than the underlying portfolio ( i t s beta was 0.39). However, the covered call portfolio underperformed the underlying portfolio on a risk-adjusted basis. Conclusions drawn from the data jnclude the following: Protective puts offer more insurance a t lower cost (loss of upside potential) than covered calls. Protective put portfolios should outperform covered calls i n rising or falling markets but underperform covered calls i n f l a t markets. Risk and return data for protective put portfolios resulting from this study support the use of protective put portfolios as a prudent investment strategy for fiduciaries.