To: yard_man who wrote (27321 ) 4/10/1998 5:34:00 PM From: Knighty Tin Read Replies (1) | Respond to
Barry, The easiest, least helpful response (my favorite kind -g-) is that portfolio insurance is futures based and put selling is options based. But there is much more to it than that. The idea in portfolio insurance, tweaked in many different ways by various brokerage firms, was that you would hold your portfolio of good stocks through hell or high water and if you thought the market was going to crash, sell S&P futures against those holdings. The problem was many sided. For one thing, nobody had enough futures sold when the market cracked. Secondly, the market fell so quickly that by the time you got futures sold, you were already well underwater. And, thirdly, everyone trying to sell futures at once took the futures to huge discounts to the cash index. That made portfolio managers reluctant to jump in to short futures and locking in large losses. In this case, the Wall Street product was properly named. Like life insurance, it costs you money if you have too much while you are alive. But, once you start dying, the premiums go up tremendously.
