The Role of Traded Options in Portfolio Management

The management of portfolios demands recognition that there is a myriad of factors which affect the market value of an investment holding other than its intrinsic worth. One such factor is the market itself. Given that the value of stocks is affected by fluctuations in the market, the only insurance portfolio managers can possibly provide themselves with in declining markets (other than liquidation) is their faith in the long-run (was it Keynes who said ‘In the long-run we are all dead’?) and the conviction that their assumptions about a company and its prospects will hold up over that long-run. This is not a great deal of protection unless you believe you know what proportion of a declining market price is due to changing attitudes to stocks in general or to that stock in particular. The answer is frequently revealed too late.