Leaping Black Swans

This article examines an option based portfolio insurance strategy where a fixed percentage of the portfolio is used to purchase in the money long-term call options with the remainder invested in a standard investment grade bond fund. Our results show a 90/10 portfolio, where 10% is invested in long term call options, has returns commensurate with the S&P 5000 while mitigating losses. These call option based portfolios don’t require rebalancing during the term of coverage and are flexible enough to suit investors with very different risk tolerances and portfolio sizes. As constructed, these portfolios outperform put option based portfolio insurance strategies and perform as well as a CPPI, with the added advantage of not needing to be actively managed.