Using options to protect a stock portfolio from market risk

Abstract

Options are one of the derivative financial instruments whose value is derived from the underlying asset's value. The underlying asset may be a common stock, a stock index, commodity futures contracts, or futures contracts on debt securities. However, evidence indicates that dealing in options dates back to the early sixteenth century AD. It is the result of many organizational innovations in the options trading mechanism introduced by the Chicago Board of Options Exchange in 1973, which coincided with the opening of the first market. An options regulator, options trading has seen explosive growth since then. The success of options as modern financial instruments was embodied in the opening of many options markets around the world.

Changing the probability distribution of investment returns in common stocks is one of the most important advantages of dealing with options, in addition to providing a wide variety of opportunities available to investors and combinations of return and risk that would not have been possible without options. This important feature led researchers to test the possibility of reducing the risk of common stocks, which has become a prominent feature of investing in common stocks in most financial markets.