Downside protection, often called a portfolio hedge, can limit portfolio losses by paying off in the event of a downturn in the value of the portfolio. Downside protection can sometimes also 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.
Faq Categories: Public Tools
Can I get Risk Weather personalized to my own investment portfolio?
Yes, though it requires a pilot account with customization and account-linking features not included in this public Risk Weather tool.Request an Adaptive demo or pilot account to test drive our breakthrough fintech technology. Pilot users can securely link brokerage accounts for automated risk analysis and downside protection pricing.
Does the Risk Weather tell me when it’s best to invest in stocks or buy downside protection?
Risk Weather can’t predict the future, though it is a crystal ball insofar as it measures what investors are expecting in terms of price volatility.
In so-called “perfect markets”—an assumption not shared by all market commentators—the price of downside protection should accurately reflect actual market conditions, and there is no investing edge to be had by timing the purchase of downside protection.
That said, investors who like to ‘buy low / sell high’ may find Risk Weather Alerts extremely useful for knowing when protection costs are relatively low or high, and for selecting the duration of downside protection coverage—for example buying shorter-term protection such as one week or one month when costs are relatively high, and buying longer-term protection such as three months or one year when costs are relatively low.
Downside protection can also be a great tool for getting invested—and staying invested—for exposure to any long-term growth in stock markets, because it limits potential losses without having to exit the market.
Risk Weather is not investment advice.
What defines the Risk Weather status, from ‘Low’ and ‘Medium’ to ‘High’ and ‘Very High’?
Adaptive currently uses an absolute scale for Risk Weather status, based on the Risk Weather definition:
| Risk Weather | VIX Range | Frequency
1990-2022 |
Notes |
|---|---|---|---|
| Low | 0 to 15 | 34% | VIX 15 is Medium |
| Medium | 15 to 20 | 28% | VIX 20 is High |
| High | 20 to 30 | 30% | VIX 30 is Very High |
| Very High | 30 or Greater | 8% |
“Frequency” is a measure of how much time the market has spent historically in these various ratings, with “Low” the most common—and “Very High” the most rare—over the last three decades.
A chart with both the VIX with S&P500 shows that “Very High” tends to correlate with stock market crashes, such as the Global Financial Crisis of 2008-2009 and the Covid Crash of March 2020.
Can I automate Risk Weather alerts?
Yes, you can automate Risk Weather alerts in two forms, for Daily Update email delivery, and also for less frequent Status Update, also email delivery, when the Risk Weather changes, for example from ‘Medium’ to ‘High’. Set an alert now.
What is Risk Weather?
Adaptive Risk Weather is a broad gauge of whether downside protection is more or less affordable based on market conditions: when Risk Weather is ‘Low’ or ‘Medium’, the cost of downside protection tends to be lower, as compared to when Risk Weather is ‘High’ or ‘Very High’.
Risk Weather measures the market’s expectations for price movements, based on the price premium and implied volatility of publicly traded stock options. Risk Weather communicates if market seas are expected to be calm or stormy, as reflected in the cost of downside protection (‘put options’ are more expensive if danger feared) and the premium which can be charged for selling upside protection (‘call options’ are also more expensive if greater volatility expected).
We currently use the VIX as our measure, though this may be refined further in the future. The VIX, often called the ‘fear index’ or ‘fear gauge’, is roughly a measure of the implied volatility of the S&P 500 for the coming 30 days, as calculated from the price of publicly traded options on the S&P 500.
Read more about ‘implied volatility’ and the VIX at Wikipedia, Investopedia, and the Chicago Board Options Exchange. Read more about the S&P 500 at Wikipedia, Investopedia, and S&P Dow Jones Indices.
Can I get personalized protection for my own investment portfolio, in addition to the available Model Portfolios?
Yes, though it requires a pilot account with customization and account-linking features not included in this public Adaptive’s Portfolio Protection Calculator tool. Request an Adaptive demo or pilot account to test drive our breakthrough fintech technology. Pilot users can securely link brokerage accounts for automated risk analysis and downside protection pricing.
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 Wikipedia, Investopedia, 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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