Tags: wall street | crash insurance | investors | economy

Crash Insurance Now Costs About 6 Percent a Year

Crash Insurance Now Costs About 6 Percent a Year
(AP)

By    |   Wednesday, 30 September 2015 11:01 AM

Wall Street makes investors nervous but, as always, stands ready to help if the price is right.

In this case, the Street also offers to sell insurance against a large loss to nervous investors. Insurance can be obtained with put options.

A put gives the buyer the right to sell a stock or ETF at a predetermined price for a specified amount of time. If you strongly believe the price of a stock you own was about to fall, you could buy a put and require the seller to buy the stock after it falls. This would protect you against the loss since you locked in the sell price when you bought the put.

Of course we never know anything with certainty in the stock market. If you are wrong and the decline doesn’t occur, the option would expire worthless. Because options generally trade at low prices, they are a way of obtaining cheap insurance.

Right now, the S&P 500 is trading just below 1,900. SPDR S&P 500 ETF (SPY) tracks that index and is trading just below $190 a share. Each share of SPY represents one-tenth of the value of the index.

You could buy a put priced about 10 percent below the current market price. If SPY falls more than 10 percent, this option would then offset the losses in your portfolio. Right now, an option 10 percent below the current market expiring in three months is priced at about 1.5 percent of the ETF’s value. On an annualized basis, this would cost an investor about 6 percent a year to maintain continuous crash protection.

Typically, crash insurance costs about 3 percent a year. Elevated pricing is a sign that investors are more nervous than usual. Despite the high price tag, crash insurance could be among the best investments available in the current market.

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MichaelCarr
Wall Street makes investors nervous but, as always, stands ready to help if the price is right.
wall street, crash insurance, investors, economy
306
2015-01-30
Wednesday, 30 September 2015 11:01 AM
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