About

Professional risk managers do not sell their stocks when they fear a market crash; they hedge them. By purchasing Put options on a major index (like the S&P 500), an investor can profit from the decline in the index to offset the losses in their stock holdings. This technique is known as "Delta Hedging" or "Beta Weighting".

This tool solves the critical question: "How many contracts do I need?" If you buy too few, you are exposed to loss. If you buy too many, you are over-hedged and wasting premium. The calculation relies on the "Beta" of your portfolio-a measure of how much your portfolio moves relative to the index. A Beta of 1.2 means your portfolio typically moves 1.2&percent; for every 1&percent; move in the index.

Formulas

To determine the number of Put contracts (N) required to fully hedge a portfolio, we compare the beta-weighted value of the portfolio to the notional value of one option contract.

N = PortfolioValue × BetaIndexPrice × Multiplier

Where Multiplier is typically 100 for standard options. The result is usually rounded to the nearest whole contract.

Reference Data

Instrument	Symbol	Multiplier (Size)	Notional Value (at 4,000)
S&P 500 ETF	SPY	100 x Price	$40,000
S&P 500 Index	SPX	100 x Price	$400,000
E-mini Futures	/ES	50 x Price	$200,000
Micro E-mini	/MES	5 x Price	$20,000
Nasdaq 100 ETF	QQQ	100 x Price	$30,000

Frequently Asked Questions

SPY trades at approximately 1/10th the value of SPX. Therefore, the denominator in the formula is much smaller, meaning you will need roughly 10 times as many contracts to achieve the same protection.

Most brokerage platforms (Thinkorswim, Interactive Brokers, E*TRADE) list "Beta" weighted to SPX in their portfolio analysis tab. If you hold only tech stocks, your Beta might be high (e.g., 1.5). If you hold utilities, it might be low (e.g., 0.6).

No. This hedges against "Systematic Risk" (market crashes). It does not protect against "Idiosyncratic Risk" (e.g., a specific company in your portfolio going bankrupt while the rest of the market stays flat).

This calculator assumes "At The Money" (ATM) puts which have a Delta of roughly -0.50 initially. However, simpler hedging often uses the total notional value protection provided here. If buying Out of The Money (OTM) puts for cheap crash protection, the math becomes more complex involving Gamma.