By Lawrence G. McMillan
With the market at high levels and many investors holding significant unrealized gains, it's important to consider portfolio insurance. Derivatives like futures and options can help shield your stock investments from potential losses.
Modern Strategies for Risk Management
Today, the popular strategy involves purchasing index puts, sometimes funded by selling out-of-the-money calls. For diversified portfolios, index puts like SPX work well, while sector-specific puts might be better for concentrated portfolios.
Key Considerations
When selecting portfolio insurance, consider the length of the coverage and the deductible. A higher deductible means lower premiums but more initial risk. Calculating the number of puts needed involves adjusting your portfolio's volatility to match the index, a process called implied Beta.
Choosing the Right Coverage
Decide on the duration of your insurance policy based on cost and your risk tolerance. Longer-term puts are more expensive upfront but may offer better annualized cost efficiency.
Incorporating derivatives into your investment strategy can provide a safety net during volatile market conditions. For more insights, including examples and how to calculate the implied beta, you can read the following article:
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