Should You Insure Your Portfolio With Options?


Think of anything you own that has value and chances are you probably have insurance on it. Whether it's your car, house, health, life or even your un-grown crops, if it has value, you need to protect yourself from loss. But for all this protection, there's still one major asset that most investors leave largely uncovered: their portfolio.

In fact, Steve Crutchfield, the CEO of NYSE Amex Options, estimates the majority of professional money managers still go freestyle so to speak when it comes to protecting their portfolios, while an even greater number of individuals choose to go it alone.

"We certainly are looking to see more entrants from the retail space," Crutchfield says in the attached video, adding that "we've got a large pool of untapped potential trading activity through some of the larger institutional money managers, something like 70% of whom don't use the options product."

Since the New York Stock Exchange (NYX) acquired the American Stock Exchange in 2008, Crutchfield says his business has grown to become the fourth largest of ten options exchanges, competing in an industry still dominated by the CBOE (CBOE). While overall industry volume is down 6-to-7% this year, he says NYSE Amex options volume was up 22% through May.

As much as recent headlines about costly hedging mistakes by JPMorgan (JPM) have rocked the confidence of investors large and small, Crutchfield is certain there's still lots of room to grow. "A big part of our efforts (to grow) really continue to be on the educational side as we work to make more potential participants aware of the benefits of the options product," he says, conceding that the business does have a bit of a "challenging reputation."

Instead of pure speculation, he's focused on far simpler protective strategies that reduce risk. In particular, he draws attention to the most basic contracts including protective puts and covered calls, the former of which he likens to an insurance strategy where you pay a premium up front and reduce your downside exposure, while the latter is used to increase the income potential of a portfolio.

Recently, many investors have embraced options indirectly via a wave of new leveraged ETFs that have come to market, but Crutchfield is quick to clarify the difference.

"An insurance return is different than what one gets from simply trading a product that gives a multiple of the exposure of the underlying market," he says.

In the meantime, the head of NYSE Amex options says he is exploring the creation of new proprietary products to meet the growing demand and large need for risk mitigation.

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