As S&P 500 Index Tops 1515, How About Some Portfolio Protection Tools?

This past Friday the S&P 500® Index (SPXTM) closed at 1517.93, and some investors are asking if now is the time to implement portfolio protection strategies.

Over the past decade the SPX Index had its highest daily close of 1565.15 on Oct. 9, 2007, and its lowest daily close of 676.53 on March 9, 2009.


Below are excerpts from recent news stories –

(1) At
“As Stocks Surge, Is It Time for Some Protection? By Brett Arends (February 8, 2013) …Many investors, as they watch stock prices rebound to levels last seen in 2007, might be wondering if it is time to cash in some of their gains. The downside to selling, of course, is that you risk missing out if the market keeps going up—and face a potential tax hit on capital gains. Another strategy is to buy insurance against a market downturn via options on individual stocks or a broad market index, such as the Standard & Poor’s 500-stock index. … Prices are now back to levels last seen in 2007, just before the crash, adds Sean Heron, who manages options-based portfolios at Philadelphia-based investment company Glenmede, which has $22 billion under management and buys and sells options. …”

(2) At
“Traders Start Playing Defense. By Steven M. Sears (February 9, 2013) Investors are quietly building defensive options positions as the stock market hovers around all-time highs. The “greed-in” and “risk-on” trade still dominates, but a nascent change is occurring as key market risks, particularly the threat of sequestration, loom menacingly ahead. With the Standard & Poor’s 500 inhaling thin oxygen around 1500, investors are bearishly positioning in financial and small-company stocks that have reacted poorly to Europe’s economic and political unrest and the U.S. economy’s malaise. Investors are buying puts,…”’s%20Magazine&View=all&Cat=FREE
After reading those news clips, you might ask – what about the past performance of protective strategies?. Below are excerpts from some index analyses and studies.


CBOE now has 10 benchmark indexes designed to show the hypothetical performance of various options-related strategies.

Two of the CBOE Indexes that are designed to provide some downside protection are —

 CLL – CBOE S&P 500 95-110 Collar Index (holds S&P 500 stocks, buys SPX put options for downside protection, and writes SPX call options for income)
 VXTH – CBOE VIX Tail Hedge Index (holds S&P 500 stocks, and buys VIX® call options)

This chart compares the performance of VXTH, CLL, S&P 500, and the S&P GSCI commodity indexes around the time of the 2008 financial crisis. During the 11-month period shown, the VXTH Index was down 25% and the S&P GSCI Index declined 58%.


Exhibit B of the paper by Asset Consulting Group. Key Tools for Hedging and Tail Risk Management (February 2012) (available at studied a time period of more than 25 years, and showed that the CLL Index had much left tail risk than the S&P 500 and S&P GSCI indexes. During the time period studied, the S&P 500 experienced 13 months with losses of worse than 8%, while the CLL Index had only one such month.


In 2009 UMass published a paper –“VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis.”
The paper found that, with a 10% allocation of VIX futures to the Equity/Bond/Alternative portfolio over the 34-month time period ending in December 2008 –

  • The portfolio’s annualized return was improved by 3.5 percentage points (increased from -5.6% to -2.1%), and
  • The standard deviation was cut by one-third (drops from 17.9% to 11.3%).


To learn more about protective strategies, please visit the Strategies and Education sections at

Before investing, please be mindful of taxes and transaction costs, and please read closely risk disclaimers at the web pages above, and in the Options Disclosure Document.