What is downside protection?

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.

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


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.

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 WikipediaInvestopedia, and the Chicago Board Options Exchange. Read more about the S&P 500 at WikipediaInvestopedia, and S&P Dow Jones Indices.