Jordan Journal of Business Administration, Volume 5, No. 1, 2009 - 97 - Portfolio Hedging with Option Strategies: An Applied Study in Amman Stock Exchange (ASE) Ass'ad Al-Ali and Rula H. Al-Halaseh ABSTRACT The purpose of this study is to investigate the impact of ATM covered call writing and ATM protective put option strategies in pure portfolio performance from risk and return dimensions. Consequently, the study aimed to investigate whether the two hedged portfolios perform better than unhedged portfolio, testifying the study hypotheses and to answer the relative questions. The study sample consisted of fifty five companies listed in ASE. Quarterly return of individual stocks after hedging with option strategies as a dependent variable and equally weighted index return (a proxy of market portfolio) as an independent variable were used. Black and Scholes model has been implemented to calculate the ATM option call and put prices. Basic investment characteristics were calculated using Market Model for individual stocks and portfolios. The study concluded that covered call option is superior to the other two strategies and more desirable for hedging in ASE. Both hedging strategies result in magnificent reduction in unsystematic risk. Simultaneously, the covered call strategy result in considerable reduction in systematic risk. Hedging a portfolio by selling covered call strategy lead to improve the performance of the portfolio according to the AIMR’s measures, Sharpe ;Treynor ; Alpha Jensen; CAPM and Sortino Ratios. Keywords: Hedging strategies; Call and Put options; Modern portfolio theory; Securities analysis; Black & Scholes Model; Amman Stock Exchange. INTRODUCTION The increasing volatility of the equity market in recent years has been very deleterious for portfolio managers with strong risk constraints. This is particularly true for pension funds, banks investment portfolios, insurance companies, and individuals who wish to preserve their capital. Moreover, the recession of Arab stocks during the first quarter of the year 2006 had extended to Amman Stock Exchange; this caused stocks to drop in value. At the same time, share prices fluctuated randomly without any means to control them. For example, Amman Stock Exchange revealed declining performance in stock prices for listed companies throughout the year 2006, as the weighted price index closed at 5518 points at year-end of 2006 compared with 8192 points at the year-end 2005 – i.e. a 33% decrease. To overcome such volatilities, Modern Portfolio Theory offers diversity, which eliminates unsystematic risk. However, portfolios are still exposed to systematic risk which constitutes about 50% of the total risk for diversified portfolios (Tergesen, 2001).This has caused great concern in many well-developed financial markets about controlling risk connected with volatility and developing a number of financial innovations and strategies that can be used to hedge portfolio risk. From among other option hedging strategies, this study had a particular interest in the buy-write strategy (the so-called covered call strategy) and selling covered put (the so-called protective put strategy). Buy-write strategy combines a long position on a stock or a basket of stocks and simultaneously a short position on a call Received on 2/3/2008 and Accepted for Publication on 20/10/2008. © 2009 DAR Publishers/University of Jordan. All Rights Reserved.