Still Not Cheap: Portfolio Protection in Calm Markets

25 Pages Posted: 17 Mar 2015 Last revised: 27 Jan 2017

See all articles by Roni Israelov

Roni Israelov

AQR Capital Management, LLC

Lars N Nielsen

AQR Capital Management, LLC

Date Written: March 16, 2015

Abstract

Recent equity volatility is near all-time lows. Option prices are also low. Many analysts suggest this represents a good opportunity to purchase put options for portfolio insurance.

It is well-known that portfolio insurance is expensive on average, but what about in calm markets? History suggests it still is. We investigate the relationship between option richness and volatility across ten global equity indices. Option prices may be low, but their expected values tend to be even lower.

Keywords: Options, Protection, Portfolio Protection, Tail Protection, Tail Risk, Volatility Risk Premium, Variance Risk Premium, PutWrite, Put-Write, BuyWrite, Buy-Write, Covered Call, Covered Calls, Call Overwriting, Overwriting

JEL Classification: G00, G10, G11, G12, G13

Suggested Citation

Israelov, Roni and Nielsen, Lars N, Still Not Cheap: Portfolio Protection in Calm Markets (March 16, 2015). Available at SSRN: https://ssrn.com/abstract=2579232 or http://dx.doi.org/10.2139/ssrn.2579232

Roni Israelov (Contact Author)

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqrcapital.com

Lars N Nielsen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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