Using Futures And Options to Reshape Portfolio
by Jean-Olivier Fraisse, C.F.A.
Portfolio management at its simplest is finding the highest possible return while limiting the risk
involved. Because economic conditions constantly change, keeping to this goal requires moving assets in
and out of the portfolio — a time consuming and (worse) costly procedure. The goal can be reached
without the tedious reshuffling, this writer says, if stock index futures and options are used.
Fraisse uses Standard & Poor's 500 index futures contracts as a tool with which to quickly increase a
portfolio's exposure to market fluctuations if a money manager is bullish or decrease a portfolio's risk if
a money manager is bearish.
Simply, portfolio management consists of seeking out the highest possible return while simultaneously
limiting investment risk. Changing economic conditions require periodic asset reshuffling, which is
costly and time consuming. Futures and options offer a faster, cheaper and more effective way to
redeploy assets or modify a portfolio risk profile. Since a portfolio beta measures its systematic or market
risk, to adjust portfolio risk, the portfolio's beta must be modified by introducing new assets or altering
the weights of existing assets. If a portfolio manager is bullish on stocks, he or she can quickly increase
the portfolio's stock exposure by purchasing stock index futures contracts such as the Standard & Poor's
500. If a portfolio manager is bearish, he or she can reduce the stock exposure by selling short stock
USING STOCK INDEX FUTURES
An S&P 500 futures contract is an agreement between seller and buyer to deliver and take delivery of,
respectively, a portfolio of stocks represented by the S&P 500 stock price index at a specified future date.
The delivery is a cash settlement of the difference between the original transaction price and the final price of the index when the contract is terminated. In practice, however, cash settlements occur in daily
increments because futures positions are "marked to market" until the contract is terminated as the
contract trading price changes.