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Avoid Buying Put Insurance When You are Most Afraid

Avoid Buying Put Insurance When You are Most Afraid by Wesley R. Gray, Ph.D., Alpha Architect, Author Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

A timely piece on S&P 500 put option prices. The authors find that S&P 500 put options get too expensive during wild times because of 2 effects:

  1. Demand for insurance sky rockets (investor utility demands safety)
  2. Supply for insurance becomes restricted (credit constraints cripple market makers)

The lesson seems to be straight forward: buy insurance when you don’t “feel” like you need it; avoid buying insurance when you “feel” like you...


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