With the advances in technology and lower costs to trading, separate account platforms and online brokers should be able to offer customized portfolio protection to their clients with the click of a button. This paper uses basic concepts from the option literature to show how this insurance could be offered in two convenient forms. In one form, it would represent a straight cash payment by customers, and in another form, investors would exchange a portion of the upside of their returns for the protection. The paper uses the Black-Scholes model to show the benchmark costs associated with this type of protection, as well as performs a simulation with an actual portfolio over various sub-periods from 2000 to 2006.

The concept of protecting oneself from unlikely, but possible events have existed at least since 225 A.D., when the Roman jurist, Ulpian, prepared the first recorded life expectancy tables. Insurance has entered the financial markets in the form of home insurance, default insurance, and most commonly in the form of options. The option market, which began trading on exchanges in 1973, has blossomed with the aid of the theoretical advances of Black and Scholes (1973). Options are now a common method used to hedge the principal invested in some underlying asset, be it a stock or bond. Although this has provided a way for individuals to hedge or protect their stock investments, it is far from perfect. Firstly, it is usually done one stock at a time, while an individual may own a portfolio of stocks. Thus, it is difficult and inefficient to hedge since it ignores the correlation amongst the stocks in one's portfolio. In otherwords, individuals are paying too much for their insurance by hedging stocks individually. Secondly, many stocks owned by individuals do not have listed options available to trade. This means that the individual would have to resort to the institutional structured product department, which is much less liquid, and hence, much more expensive. Thirdly, it still remains very difficult for the individual to understand exactly what is being protected. In otherwords, protection of a few stocks in one's portfolio does not really give an investor a good idea of how his entire portfolio is being protected. The temporary aspect of most protection also turns all investors into active managers, needing to roll-over their option agreements as they expire. This is a very tedious task. There is no easy way to protect one's entire portfolio. Fourthly, although Long-Term Equity Anticipation Securities (LEAPs) are becoming more common, there is no easy way for investors to protect their investments for periods longer than two years.