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 Mini-SPX Put Options on the S&P 500 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, since Mini-SPX Put options are sold in 100-share increments with a notional value in the neighborhood of $40,000 each (100x the current SPY price). Rounding on 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.