Portfolio Insurance

See: Portfolio. See: Hedge Ratio.

When you "buy portfolio insurance," you are spending money to buy put or call options, something like 5-20% away from current portfolio prices, so that, should the best laid plans of mice and men go awry, you will have netting in the form of derivative hedges to cushion your fall.

If portfolio insurance were free, everyone would do it always. But it ain't. In fact, portfolio insurance pricing varies massively, usually in lockstep with the VIX. Not the Vapo-Rub.