The market has been making me nervous lately, so I started looking for ways to protect my share portfolio should the market fall suddenly.
I learned about this concept of portfolio insurance from Dr. Joseph Belmonte and decided to start playing with it to see if it would work. Basically the idea is to buy S&P put options with a strike price between 5% and 15% below the current market value that would expire in a few months.
So we are self insuring the first 5% to 15% of the loss and am hoping the put option covers the rest if there is a sudden fall. The self insurance part is supposed to make the put options more affordable - just like a deductible on your car insurance.
Here is what I learned
These S&P put options are highly volatile price wise - going up and down all the time.
Using this volatility and trading around my position (buying when it drops and selling when it rises) I have been able to effectively insure about 50% of the value of my portfolio for free. Not sure if I will be able to keep doing this - could be beginner's luck
My portfolio seems to move twice as much as the market many days. This is not what I expected because my portfolio contains a mixture of high and low beta stocks - but it is what I observed. Maybe the Russel 2000 would more closely track my portfolio?
My discipline sucks when it comes to these put options - I see a big move and want to take the profit or a big drop and buy more. Trading around my position was a symptom of my lack of discipline, not by design. I am concerned this lack of discipline will mean I will have sold the put options only part way through a market drop and not benefit fully from them.
I have no idea if this portfolio insurance will stand the test of time - but I am going to keep playing with it and see what happens. Stay tuned.