Series 7 - General Securities Representative Exam

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Your client is heavily invested in a diverse portfolio of over 1000 small cap stocks. She is concerned about a short term decline in small caps, but is bullish on them in the long term. What might you suggest for her in order to hedge the short term price risk?

Buy puts on the us dollar index as it will also decline
Buy puts on the each optionable individual stock
Buy puts on the S&P 500 index
Buy puts on the Russell 2000 index


The correct strategy is to buy puts on the RUT Russell 200 small cap index. Buying puts on 1000 or so individual stocks will not be cost effective due to fees and commissions. S&P 500 is large cap stocks and there is no way to know what the value of the dollar will do in response to a short term market decline in small cap stocks