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Profit Protection with Puts, Stops, and Sequential Monitoring

Article Quant Q&A · Author: JoLu
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Summary

The response discusses ways to protect portfolio value and manage open positions. It describes portfolio insurance as hedging share exposure with put options, with puts placed below the acquisition price so they can gain value during a sharp decline. It distinguishes this insurance from stop orders, which aim to exit at a chosen level but may not execute at that level in fast falling markets.

The answer also mentions Shiryaev–Roberts stopping procedures from statistical process control as a way to monitor risk, and points readers toward literature on stock market crashes. These are suggestions rather than a developed strategy: the document gives no comparative tests, implementation details, or evidence for the suggested hedge sizing. Its claims about stops and crash behavior should be treated as general cautions, not guarantees about execution or protection.

Key ideas

  • Portfolio insurance can hedge equity exposure with put options that gain value as prices fall.
  • Stops seek to exit at a preset level, but fast markets can lead to execution away from that level.
  • The response distinguishes option hedging from stop based trade exits.
  • Shiryaev–Roberts procedures are mentioned as a statistical process control approach to monitoring risk.
  • The document offers recommendations and practitioner opinions without empirical comparisons or implementation analysis.

Tags

EquitiesOptionsRisk managementExecution
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# Books/Articles related to profit protection?


# Books/Articles related to profit protection?












Anyone have any advanced book/article recommendations related to profit protection or adjusting open positions to maximize profits once a position is taken? I only have a cs degree but have read books of Mark Minervini or Stefan's Machine Learning for Algorithmic Trading where they talk about profit protection and adjusting positions briefly but never really found anything that would dig deeper into the topic.

Thanks

## Answer by Con Fluentsy (score 1)

https://quant.stackexchange.com/a/81003

What they are probably talking about is what was called in the 80s as portfolio insurance you hedge your portfolio in times of rising unease with put options. Generally you match your portfolio of shares with put options at some point before your acquisition price, generally 5% of your portfolio is spent on out of the money puts that in times of distress quickly become in the money. Stops are not insurance they are a mechanism by which you exit a trade at a set point, to preserve profit, but in rapidly falling markets stops don't hold long enough to sell out and get out. Stops and stop limits are no good for crashes or big drawdowns.I am a quant and have read all this advanced math stuff and much is good but from all the stuff I have read lately here, people are divorced from the reality of real physical trading, just because you have a computer and an amazing formula does not alter market realities.Stopping time rules are highly theoretical, I use Shiryaev Roberts stopping time procedures from statistical process control. it is a real thing which addresses real risks, not mathematical abstraction.See William Ziembas book on Stock market crashes predictable and unpredictable.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.