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When Risk Management Fails


Put “protection” has come up short lately—but there’s a better way.

Put options are often a go-to risk management strategy among investors seeking protection against stock market declines. But for more than a year, puts have done little to safeguard many investors’ portfolios.

Case in point: While the S&P 500 Index is down 15.3% since the end of 2021, an index designed to protect investors from negative S&P 500 returns (the CBOE S&P 500 5% Put Protection Index, which tracks the value of the S&P 500 and a monthly 5% out-of-the-money put option) has fallen by 17.2%—1.9 percentage points worse (see the chart).

Source: Bloomberg 1/17/23.1

Ultimately, derivatives such as puts require investors to accurately forecast the market’s direction and timing of its movements. Puts have fizzled out largely because of the nature of the current equity market downturn. Stock prices’ surprisingly long and slow grind south, combined with elevated levels of volatility, have made put options more expensive—without the big and rapid market drops that cause puts to pay off. So, while put investors may have gotten the direction of stock prices right, they weren’t so lucky with the market’s drawn-out decline.

The good news: There are several ways to potentially mitigate this type of outcome while still taking advantage of the protection puts can offer investors. Some examples of active derivatives strategies include:

  • Using an option collar, where call options are sold to reduce the price of the put options.
  • Spreading out option maturities to minimize the risk of getting timing decisions wrong.
  • Spreading out the strikes—the prices at which puts can be exercised— to reduce the risk of getting the magnitude of price movements wrong.


We believe having the flexibility to incorporate these types of active strategies can potentially generate more consistent, intuitive results—particularly when the markets don’t behave as investors (and their investments) want them to.


This commentary is written by Horizon Investments’ asset management team.

1The PPUT Index is the CBOE S&P 500 5% Put Protection Index, which tracks the value of the S&P 500 and a monthly 5% out-of-the-money put option. The SPXTR Index is the S&P 500 Total Return Index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. In the SPXTR, changes in the index level reflect both movements in stock prices and the reinvestment of dividend income.

Past performance is not indicative of future results. Options are not suitable for all investors and carry additional risks. Options may not perform as intended and could expose an investor to losses, e.g., option premiums, to which it would not have otherwise been exposed.

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