9. Why say DBOE Options helps protect Portfolio Investment?

One of the useful values often used in options is the ability to protect an investor's portfolio.

Each DBOE options contract has the ability to help users protect their portfolios by up to 20%.

Take a look at the following example:

Lily is holding ETH. The spot price is $1000. This week, when the Fed announces interest rates, the ETH price will have a big fluctuation. Lily is not sure if the price will go up or down.

If the price goes up, Lily will make a profit, but if the price goes down further, she will have a bigger loss.

To minimize risk, Lily decided to buy put options to protect her portfolio.

Lily predicts that if the ETH price falls, it could drop to $800 next week, so she buys a $1000–$800 put option that expires in 1 week. Lily needs to pay the seller a premium of $2.8 (calculated by the Black Scholes formula. See details here).

On the expiration date:

  • Assuming ETH rises to $1100:

Lily will profit ($1100-$1,000) - $2.8 = $97.2

  • Assuming ETH drops to $800:

Lily only lost $2.8 of the cost spent to buy the option (this is the maximum loss when the price is in the predicted range of $1000–$800).

This loss is much smaller than the $200 loss (72 times larger) when the price drops to $800 if Lily doesn't use the option to protect her portfolio.

The example above shows that DBOE options are a great tool to help investors limit losses when trading against large fluctuations.

Last updated