The idea worth investigating
FPM house pricing diagnostic, 138 monthly observations. These are differences in compounded annual returns for a portfolio rebalanced to 98% SPY and 2% selected puts, using midpoint versus bid/ask assumptions. The smaller universe averaged about 19 holdings, against about 90 in the paper, and omits its ex-dividend exclusion. The diagnostic permits fractional contracts and excludes commissions, market impact and displayed-depth constraints. It is retrospective arithmetic, not realized execution.
Scope: a completed smaller-universe house adaptation with a separate execution simulation; it does not reproduce the full published universe.
A hedge can look inexpensive on the screen and prove expensive to own. The premium is one bill. Repeatedly crossing the spread is another. With low-priced options, that second bill can be a large fraction of the first.
Poh Ling Neo and Chyng Wen Tee offer a concrete alternative to index insurance in Tail Risk Hedging: The Search for Cheap Options. Their 2023 study selects a diversified portfolio of inexpensive single-stock puts. We asked whether a smaller, liquid-stock version could preserve the benefit, and how much depended on execution. Original study
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The headline is the starting point. The subscriber analysis takes you through:
- The spread-sensitivity curve and the period that briefly favored cheap puts.
- The next-session result after commissions and displayed-size penalties.
- The missing filters and portfolio choices that limit the comparison.
AI assists curation and drafting. The research status distinguishes paper reviews from house tests. Read our research approach.