A reexamination of portfolio insurance: The use of index put options

A study reexamines the mechanics of portfolio insurance when index put options are used. Conventional portfolio insurance is considered where one seeks to insure a minimum (floor) value of a portfolio over a finite horizon. The feasibility, cost, limitation, and implementation of such insurance strategies are examined. It is found that these strategies are not as restrictive as previously thought. In fact, a wide range of listed put contracts on the S&P 100 and S&P 500 traded on the CBOE may satisfy portfolio insurance needs for a wide variety of portfolios. Many of these put contracts are deep out of the money and are thus relatively inexpensive. With the introduction of the FLEX options by the CBOE, portfolio managers can, in principle, design the index options they need for portfolio insurance. The model developed can help them to design the most appropriate contract terms such as strike price and contract size. Finally, the insurance strategies are empirically tested using monthly data series on S&P 500 put option during the period January 1988 to December 1993.