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Investors often have insurance for their house, car, life and business, but many don't have insurance for their stock investments and that is a real shame. One way to insure stock investments is by purchasing s. An investor can insure an individual stock or a portfolio of stocks using s. In the blog article, “”, we examined the relative costs and trade-offs for insuring each individual stock versus insuring a portfolio of stocks using index s. The basic gist of the article is that it costs less to insure a diversified portfolio of stocks with index s than it costs to insure each position individually.
Insurance With VIX Options
It is also possible to insure a diversified portfolio of stocks with the Chicago Board Options Exchange Volatility Index () s. The VIX is a weighted blend of prices for a range of options for the S&P 500 index. When the market starts to drop, the VIX moves in a counter direction, so purchasing VIX s can be used for . The counter movement of the VIX versus the S&P 500 index () is illustrated in the chart shown below:
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As shown in the graph, at each instance of a drop in price for the SPX (see red oval areas), the VIX countered with a spike upward. A purchaser of VIX s could see a significant increase in the value of the options during a market downtrend order adalat no rx required, so VIX s can be used to hedge or insure a portfolio of stocks.
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Option Insurance Analysis
We analyzed insuring a portfolio of stocks over the time period from 2007 to May of 2010 using PowerShares ETF () s, SPDR S&P500 () s and VIX s. For this analysis, we selected an option with an expiration of one month out for QQQQ, SPY and VIX on the Monday following options expiration and with an option value close to $0. 50. Order adalat no rx required in the analysis, we assumed one contract of an option would cost 0. 5% of a portfolio for insuring the portfolio. For example, a portfolio of $10, 000 would require one contract with an option price of $0. 50, which would require $50 to purchase the option (not including brokerage fees and commissions). The results of the analysis are shown in the table below:
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|Stock Option Insurance Profit/Loss|
|Purchasing Option One Month Out & Closest to $0. 50 on Monday After Expiration|
|QQQQ Put||SPY Put||VIX Call|
|2007||+3. 7%||+6. 3%||-2. 0%|
|2008||+2. 4%||+5. 1%||+18. 0%|
|2009||-5. 8%||-6. 1%||-6. 5%|
|2010*||+1. 2%||+0. 8%||+5. 5%|
|Total||+1. 5%||+6. 1%||+15%|
|*Partial - through May 2010|
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As shown in the table above, the SPY s performed best in the year 2007 with a +6. 3% return and the VIX s performed the poorest with a loss of -2. 0%. So for a portfolio of $10, 000, the SPY s would have generated a profit of $630, whereas the VIX s would have experienced a loss or a cost of $200.
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However, in 2008 which was a terrible year for the with the financial crisis and the bankruptcy of Lehman Brothers, the VIX s performed the best with a +18. 0% return versus a +5. 1% return for the SPY s. For a portfolio of $10, 000, the SPY s would have returned $510, but the VIX s would have returned a much greater profit of $1, 800.
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In 2009, the had a banner year and each insurance method, QQQQ, SPY and VIX, resulted in a loss (or cost) of around -6%. So for a portfolio of $10, 000 the insurance would have cost $600, which makes sense as we are using 0. 5% of the portfolio each month to purchase (0. 5%*12=6%).
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2010 and the Flash Crash
In the first half of 2010, the experienced the "Flash Crash", where the market sustained a very large loss and recovery in a matter of a just a few minutes. Each of the insurance methods had a positive return, however, the VIX s had a very nice +5. 5% return versus +1. 2% and +0. 8% for the QQQQ s and SPY s, respectively. For a portfolio of stocks worth $10, 000, order adalat no rx required the VIX s would have returned $550.
The real benefit of using VIX s for is exhibited over the years from 2007 to May of 2010 with a total return of +15% versus returns of +1. 5% and +6. 1% for the QQQQ and SPY s, respectively. Insuring a portfolio of $10, 000 with VIX s would have returned $1, 500.
QQQQ + VIX Call Options
We wanted to show the combined result of insuring a portfolio of stocks using VIX s, so we selected the QQQQ ETF as a proxy for a portfolio of stocks. We analyzed the result of insuring the QQQQ ETF with VIX s over the time period of 2007 to May of 2010 with the results shown in the table below:
|Profit/Loss of QQQQ + VIX Stock Option Insurance|
|QQQQ||VIX Call||QQQQ+VIX Call|
|2007||+3. 8%||-2. 0%||+1. 8%|
|2008||-33. 4%||+18. 0%||-15. 4%|
|2009||+64. 0%||-6. 5%||+57. 5%|
|2010*||-0. 8%||+5. 5%||+4. 7%|
|2007-2010*||+2. 6%||+15. 0%||+17. 6%|
|*Partial - through May 2010|
QQQQ + VIX Call Options Analysis
As shown in the table above, the QQQQ ETF returned +3. 8% in 2007, but the VIX s returned -2. 0%, so the resulting return was +1. 8%. In 2008 with the financial crises and the bankruptcy of Lehman Brothers, the QQQQ ETF lost -33. 4% which was offset by the +18. 0% gain of the VIX s resulting in loss of -15. 4%. In 2009, the QQQQ ETF returned +64. 0% and the VIX s had a loss of -6. 5% which resulted in a combined profit of +57. 5%. And for the partial year of 2010, the QQQQ ETF was down -0. 8% and the VIX s returned +5. 5%, which resulted in a profit of +4. 7%.
2007 to May 2010
Overall for the 2007 to May 2010 timeframe, the QQQQ ETF returned +2. 6% (note: the +2. 6% is not the sum of the returns for the prior years, but rather the actual return of purchasing QQQQ in January of 2007 and its value as of May of 2010). The net return for the VIX calls over the 2007 to May 2010 timeframe was +15. 0% and the combined return of the QQQQ ETF and the VIX s was +17. 6%.
An investor purchasing the QQQQ ETF in January of 2007 would have experienced a measly +2. 6% return as of May of 2010, and would have suffered through a terrible loss in 2008 of -33. 4%. However, an investor purchasing the QQQQ ETF in January of 2007 and also insuring with VIX s would have a cumulative return of +17. 6% and would have only had to experience a loss of -15. 4% in 2008. Insuring the QQQQ ETF with VIX s from 2007 to May of 2010 not only significantly increased the return, but also softened the nasty market downturn of 2008.
VIX & European Style Options
The options for the VIX are European style options, which means they can only be exercised on the options expiration date and can’t be exercised early as in the case of American style options. The VIX is also a mean reverting index with the average value of the VIX around 19. So if the value of the VIX is greater than 19, then there is a greater chance of it falling than continuing to rise, and vice-versa. The combination of European style options and the mean reversion nature of the VIX results in option prices having values which are counter intuitive for the VIX. For example, on May 7, 2010 the value of the VIX closed at $40. 95 and the value of the May with a strike of $30 was at a price around $6. For a normal (not mean reverting like the VIX), the intrinsic value of the would be the difference between the underlying and the strike price, which in this case would be $10. 95 ($40. 95-$30). So the price of the May with strike of $30 should have been at least $10. 95 based on the conventional wisdom for option pricing, much higher than the actual price of $6. The VIX options can still be bought and sold, but the price received may be significantly different from what is normally expected. Incidentally, the price of the VIX settled at 34. 53 for May 2010 and the price of the VIX May 30 would have received $4. 53 after exercise, not too far from the $6 price on May 7, 2010.
Based on our study, we have decided to introduce the "Safety Net". Each month we will publish a VIX trade in order for our customers to insure their portfolios. The Safety Net will be made available for all of 's TradeFoliosTM for trading and will be especially useful for customers investing in Titanium's covered call trades. Even customers trading Iron Condors or Double Diagonals should find the Safety Net useful, as it may help offset a loss when the market decides to take a tumble. There's no additional charge for the Safety Net, as it is included as an add-on for all of 's TradeFolios. Customers may also find the Safety Net useful for insuring a portfolio of long positions in stocks. In general, customers could use 0. 5% of their portfolio every month as insurance. A portfolio of $100, 000 could be insured for $500 per month. Unlike auto and home insurance, the VIX call insurance provided by the Safety Net can actually return a profit over the cost of the insurance. The Safety Net is more similar to life insurance, except the person gets to enjoy the benefits of an insurance distribution instead of the beneficiaries.
Autotrade the Safety Net
Any customer of may opt to have the Safety Net automatically traded in their accounts using autotrade with select brokers. For example, a customer desiring to insure a portfolio of $100, 000 using 0. 5% of the portfolio per month could opt to enter $500 as the Trade Amount with the trading parameter set to Specific Dollar Amount (calculated as $100, 000*0. 5%). Every month we will post a new trade to the Safety Net and the broker will purchase VIX s for the account. For the $100, 000 account example using 0. 5% per month, the broker would purchase up to $500 of VIX calls each month as for the account.
For example, customers can sign up for the Safety Net with optionsXpress after logging into their account by selecting "Account", then "Xecute", then selecting the Investment Publisher as and then selecting the Service as "Safety Net".
The has been extremely volatile over the last ten years, dot. com bubble, 9/11, housing bubble, financial crisis and the flash crash of 2010, for example. We hope our customers will take advantage of the Safety Net for taking some of the “bumpiness” out of the and maybe sleep better at night. We are going to add a new trade for the Safety Net on Monday 6/21/2010 and we also plan to add new Safety Net trades on every Monday following option expiration.
For more information about how to identify and research great , visit the website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions' premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
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[tags] $SPX, S&P 500 Index, $VIX, CBOE S&P 500 Volatility Index, QQQQ, PowerShares QQQ Trust ETF, SPY, S&P Depositary Receipts Trust ETF [/tags]