jwblue wrote:Is this a good strategy? If not, why?
For the individual at-home investor, absolutely not. First reason: monster spreads and fees alone will eat a lot of your risk premium, hence you start from a losing position. No professional risk manager or derivatives trader purchases protection this way, which brings me to the second reason.
Second reason: the derivatives/ call-put options available to you via your brokerage are for novices, and exist to be gamed. Shadow banking is real. There's an entire universe of unique and tailored derivative products to protect against all kinds of events (like market drops), with all manner of complex and sophisticated products. Welcome to the world of ISDA and non-traditional product channels, where monied players get to write and tailor their own derivative contracts on terms far more favorable than you will ever see, including lower costs, lower fees, much
lower spreads, and with times/durations ("tenor" in banker parlance) the home investor will never, ever get to purchase on an individual basis. Do not play this game, because none of this is available to you, period. Hedge funds, banks' "Delta one" trading desks, and banker proprietary trading ops need only apply. Options and derivatives is a trader's club, and you're not in it.
If you want to get just a taste of this, go and read "The Big Short" by Lewis. Read how hedge funds were purchasing super-cheap "puts" on subprime mortgage-backed securities, using individually-tailored and negotiated ISDA derivative agreements (credit-default swaps) to essentially purchase massive, long-term puts on subprime MDS, and they did it cheaply -- without the spreads, costs and fees you will be paying for your market puts. None of this was revealed or disclosed on any market at the time (see
AIG implosion and resulting market detonation). Dodd-Frank tried to reign in some of these OTC abuses (e.g. institutions like AIG and Lehman writing enormous amounts of swaps they could never cover, resulting in massive enterprise risk which actually came to fruition as their balance sheets imploded, bankrupting Lehman and requiring a $170 billion AIG bailout) but we are a long, long way from anything approaching transparency.