What is downside protection?

Downside protection, often called a portfolio hedge, is a general term for investments and other agreements which pay off in market and portfolio declines. Common forms include ‘put options’ and futures contracts which require special expertise and trading permissions.

Downside protection can limit potential losses, thus reducing the overall risk of a portfolio even while staying invested for potential growth.

The cost of downside protection is a drag on a portfolio’s performance, compared to an unprotected portfolio. At the same time downside protection can sometimes lead to improved risk-adjusted returns as compared to buy-and-hold without protection, if protection proceeds are reinvested at lower prices in a portfolio which is growing over the long term.

The Portfolio Protection Calculator programmatically generates a list of possible put option contracts with strike price and expiration based on the selection of Protection Level and Protection Period. This is NOT investment advice. Consult a licensed broker for options trading information and approvals.

What is Projected Risk and Projected Value in the Portfolio Protection Calculator?

The Projected Risk in Adaptive’s Portfolio Protection Calculator is a powerful tool to measure how downside protection can ‘dial down’ the risk of losses in a portfolio, even while staying in the market for expected growth over the long-term.

Projected Risk compares the observed downside volatility of three different portfolios, based on the selected Model Portfolio:

  • Market Risk. Measure of the observed downside volatility of the S&P 500 index. It is in effect a portfolio made up entirely of the S&P 500. Read more about the S&P 500 at WikipediaInvestopedia, and S&P Dow Jones Indices.
  • Portfolio Risk. Measure of the observed downside volatility of the selected Model Portfolio. Model Portfolios which are diversified among asset classes, such as bonds in addition to stocks, tend to have lower observed downside volatility compared to Adaptive’s measure of Market Risk.
  • Protected Portfolio Risk. This reflects the reduced downside risk of the portfolio, with the selected Protection Level. Increasing the Protection Level—in effect adding more protection— for example from ‘80%’ to ‘90%’ will tend to ‘dial down’ the Protected Portfolio Risk as more protection is added.

Adaptive currently uses an absolute scale for characterized Risk, based on the Risk Weather definition:


Projected Risk VIX Range Notes
Low 0 to 15 VIX 15 is Medium
Medium 15 to 20 VIX 20 is High
High 20 to 30 VIX 30 is Very High
Very High 30 or Greater  


The Projected Value shows possible outcomes for the selected Model Portfolio based on the selected Protection Period, with the selected Protection Level also displayed as Potential Losses. The top and bottom projections represent the least likely outcomes, calculated as likely to occur only three in 1,000 times (three standard deviations).

What is the ‘Market Protection Estimate’?

The Market Protection Estimate is the estimated price of downside protection based on recent trading prices for a market hedge that is liquid and often relatively inexpensive. Price estimates for downside protection are currently based on the S&P 500 market index, Nasdaq market index, and Russell 2000 market index with approximated strike price & expiration. Further refinements are in the works for the Portfolio Protection Calculator.

Market Protection has a trade off of accepting some tracking error, meaning that is protection for a related but not identical portfolio. See Market Protection for the specific ‘put option’ contracts being priced. Adaptive’s Portfolio Protection Calculator adjusts the number of put option contracts, and the associated price estimate, in part based on the so-called ‘beta’ of the Model Portfolio being considered for protection, often resulting in lower estimated protection costs for portfolios which are diversified for example with bonds as well as stocks. Read more about the finance use of ‘beta’ at Investopedia and Wikipedia.

Larger portfolios enjoy some economies of scale. The Adaptive tools also look for Mini contracts when they are available, though rounding and smaller accounts may involve some degree of over-hedging.

This technology preview of the Portfolio Protection Calculator also lists put contracts under Portfolio Protection for individual holdings. Tracking error is typically lower, as compared to Market Protection but the price is usually significantly higher.

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What is Adaptive’s Portfolio Protection Calculator?

Portfolio Protection Calculator measures downside risks and estimates the cost of downside protection, based on market conditions, for a range of asset allocations and popular model portfolios.

Change the Protection Period and Protection Level to see how price estimates (Market Protection Estimate)—and Projected Risk—change for a selected Model Portfolio:

  • Protection Level. A higher Protection Level protects more portfolio value, and almost always costs more, all other things being equal, than a lower Protection Level which allows for greater losses. ‘90% Protection’ means that 90% of the portfolio value is protected—in other words, losses are limited to 10% of the total portfolio value and Protection will pay out for any losses in excess of 10%. The higher the Protection Level, the more likely there will be a Protection payout.
  • Protection Period. A longer Protection Period protects portfolio value for a longer time, and almost always costs more, all other things being equal, than a shorter Protection Period. The longer the Protection Period, the more likely there will be a Protection payout. Protection can also be renewed (also known as “rolled”) for continuous protection whether each Protection Period is shorter or longer.

(See Adaptive Risk Weather for a broad gauge of whether downside protection is more or less affordable based n market conditions.)