Madoff Begins Speculation on Broad-Based Portfolio of S&P Securities Hedged with Derivatives

According to a 1992 interview that he gave the Wall Street Journal, Madoff says he began using a new options strategy for his investment business back in 1982: "The basic strategy was to be long on a broad-based portfolio of S&P securities and hedged with derivatives,' such as futures and options. Such a strategy, he said, allowed the investors 'to participate in an upward market move while having limited downside risk.'"

One of Madoff's hedge-fund-offering memorandums describes his strategy this way: "Typically, a position will consist of the ownership of 30-35 S&P 100 stocks, most correlated to that index, the sale of out-of-the-money calls on the index and the purchase of out-of-the-money puts on the index. The sale of the calls is designed to increase the rate of return, while allowing upward movement of the stock portfolio to the strike price of the calls. The puts, funded in large part by the sale of the calls, limit the portfolio's downsid