Institutional investors often use protective puts?

Question

Is true that institutional investors often use put options to protect (hedge) most of their stock investments?

Answer 1

No, not true at all. The cost is prohibitive. Maintaining an inventory of puts can easily cost 10% or more of the MI on an annualized basis.

Buying protective puts and its cousin strategy, collars, are two strategies often taught to newbies by those expensive options seminars because they - the strategies - are easy to explain and sound reassuring to the inexperienced.

A partial downside protection can be obtained by selling calls (not puts) at market highs. There are also bear spreads. An investor concerned about downside can also sell part of his holding, although by doing so he will crystallize the tax consequences.

Answer 2

If you are sophisticated investor, you should understand there are different strokes for different folks. It is much more important that they don't loose money and minimize costs than they make a monstrous profit. Insurance is about risk management not about taking risks. Also depending on which part of their assets you are referring to, there are regulations about how they can invest it. I'm more interested in having my insurance with a company that will be around when I die and offers it to me at a fair price than one that makes the biggest profit.

Answer 3

I am not sure whether they buy puts. But in the 80's they used to sell puts when the price was high as insurence as well as to book gains.