How effective are protective puts?
Put options are often considered the gold standard in downside risk management. However, protected portfolios tend to behave very differently from textbook illustrations as the simulations and empirical studies in our latest research paper show. Systematic protective put strategies don't just suffer from the cost of the insurance premium but also provide pretty poor protection once drawdowns are not perfectly aligned with the option's lifecycle. In the worst case the strategy delivers lower returns at higher not lower risk.