Unit 4 · Level 3 · Portfolio hedging
Protective puts: the price of sleep
Hold your assets, buy a put beneath them: below the strike, every further loss is the insurer's problem. It's clean and it works. Like all insurance, though, it bills you whether or not the house burns. Skew from Unit 1 makes equity puts structurally expensive, and the bill arrives again every time the old policy expires.
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What you get asked
A 'protective put' position is…
Asset plus insurance: you keep the upside (minus premium) and the put becomes a floor under the downside. Options League 1's insurance framing, now portfolio-sized.
Quarterly protective puts on your €20,000 portfolio cost €300 each time. What do four quarters of protection cost as a % of the portfolio?
€300 × 4 = €1,200, and €1,200 ÷ €20,000 = 6% per year. Markets return roughly 7-9% in an average year. The insurance can eat most of it.
The honest long-run math of permanent put protection:
Skew means you overpay by design, and most years end without a crash. Studies of always-hedged equity portfolios consistently show long-run underperformance. The drag is the deal.
Match each piece of the protective put to its role
One-off protection before a specific storm is a tool; permanent protection is a subscription. Know which one you're buying.
Like home insurance, protective puts are judged by the sleep they buy. Most years the premium is simply ___.
That isn't failure; it's insurance working as designed. The mistake is expecting a hedge to double as a profit center. 🐜
The rest of this unit
Puts, collars and tail hedges: what protection really costs, and when it's worth it.