Theoretically it should provide protection. Having said that, I can obviously say nothing about the people who are trying to get folks to sign up for their management services. I believe one is always better understanding things and doing yourself. Then, if you do lose your money, at least you had the experience and education of the process! :-D kp
Ya, 10% on the whole portfolio per year ... and of course, these guys are foaming at the mouth w/ excitement at the idea of only losing 10%. I can't tell you how many times I've heard "shit, if I only broke even I'd be ecstatic". And thanks, it took me 10 months, but I guess I finally broke 100 posts. I read here a whole lot more than I post.
The crash of 1987 October for equities began earlier that year. In 1987 April, the Bond market crashed. Major clearing systems and clearing firms were flooded with tickets and trades and under capitalized accounts to the extreme. I can't say which firm I was consulting at during that time, however they represented a huge percentage of the retail and professional marketplace. They literally shut down (controlled slow down, almost like the terms used in labor strikes). Simply put, during the late 80's the concept of Portfolio Insurance was used and sold liberally to all these Instutional firms, Pension Funds, Banks, Brokerages and Retail accounts. Buying Put Options (swaptions, caps, collars, floors, etc.) as well as trading futures and large basket futures (at that time the S&P500 and other associated baskets were new) to protect their holdings became a secondary marketplace of its own. In fact the trading volumes and the value of the trades exceeded the collective amounts of their combined underlying equities and positions. Under the weight of these "insurance" contracts exceeding their underlying obligations the swings and whips became fast and furious. In short, the mixing bowl threw more batter outside the bowl than remained. Once others began to realize that even the insurance mechanisms needed re-insurance the feedback loop started and cascaded into a full scale sell-off. In short terms, some older, wiser Depression Era Senior Officers decided that they should unwind everything and take trades and money off the table. Quickly the electronic boards lit up with more sale orders than the floor traders would have ever expected. They folded within one - two days time, and there went their insurance. Simply put someone has to write the Put contract, in order for someone to purchase it. When they're no longer around, well you see how the collapse began and cascaded downward. Get it in writing, which will never be tendered, else wise seek to "self direct" your 401K, uh, 201K, uh 101K.
I certainly appreciate the historical perspective. I was delivering papers the day after the '87 crash and really had no clue what had happened ... the world seemed the same to me that day as it had the day before. You give so much information, I'm not sure if you're confirming my fear that my cohorts will be chopping small winners into losers for the next several years or not. You mention that someone has to write the put ... I'm assuming that the put will be written when they go long on the security. I doubt highly that they'll be buying on a crash day so the put should fill w/o a problem. Money managers have lost me a bundle over the years, so I'm always very skeptical the second they open their mouths. I think some folks think I'm paranoid when I started questioning the 10% claim. I didn't even explain to them how a winner could become a loser.
To "write" a put means simply to sell one. You don't need to buy the stock or anything, just have enough $$$ in your account to satisfy your broker that if things go against you (stock drops) you will be able to pay. Alot of puts are sold by Market Makers on the floor of the CBOE. They have developed methods of spreading around and hedging their risk, so if things go against them, they're not wiped out. Obviously it doesn't work for everyone all the time, and from time to time a MM "donates" his capital to the general market place and is out of business. Don't feel sorry for them, though. The bid/ask spread on options is HUGE and the MM's have the privledge of taking advantage of it all day, every day. The primary incentive to sell puts, for the retail customer, is to collect the premium and watch it expire worthless. If stock goes up, or stays the same, you will succeed. However, I believe for the retail customer, selling naked puts is insane. The risks far outweigh the benefit, and the probability of a significant correction in the market is just too high. I would recommend to anyone wanting to 'insure' their portfolio to not put it in the hands of a manager, but spend a little $$ and time, learn the system, and do it yourself. Cheer, kp