The Temptation of the 95% Strike Put

May 17, 2022 | Products

Investors are always reluctant to buy puts to protect their portfolio. Indeed, the market “usually goes up” and spending premium to buy protection is seen as a waste of money and a source of performance impairment. Worth noting that they usually buy and hold the hedge until maturity.

They go for cheap hedges. Considering vanilla solutions, for 3-month maturity, the 95% strike is very often a favourite. A 95% put is cheaper than the ATM put (by around 1.70%) but at the same time 95% does not seem too far out : in other words if the market goes down it will go there, so it looks like an efficient hedge.

In practice the scenarios where the SPX is down between -5% and 0% make up for 18% of the occurrences, it’s a lot. Scenarios where SPX is down more than -5% make only 16.20% of occurrences, and to breakeven you need a move down of around -8%.
The wise investor (in terms of timing) who bought a 95% Put on SPX 3month ago would have paid more than 3.00% for it and got only 3.50% back… a very poor reward for a very good view.

There are much better ways of cheapening hedges and history shows that lowering the strike is not the right way. We will see better solutions!

Strike Put

Eric Barthe

Eric Barthe

Founder of

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