Mixing Exposure  •  253
When you bought the protection, the index was trading at 1,375, so 
you bought one-year puts about 5 percent OTM at $1,300. If the market 
had fallen heavily or even moderately during the first five months of the 
contract, your puts would have served you very well. However, now the 
puts are not 5 percent OTM anymore but 23 percent OTM, and it would 
take another Lehman shock for the market to make it down to your put 
strike.
Keeping in mind that buying longer-tenor options gives you a better 
annualized cost than shorter-tenor options, you should be leery of entering 
into a hedging strategy such as the one pictured here:
S&P 500
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
8/1/20129/1/201210/1/201211/1/201212/1/20121/1/20132/1/20133/1/20134/1/20135/1/20136/1/20137/1/2013
GREEN
Buying short-tenor puts helps in terms of providing nearer to 
ATM protection, but the cost is higher, and it gets irritating to keep 
buying expensive options and never benefiting from them (funny—
no one ever says this about home insurance). Although there are no 
perfect solutions to this quandary, I believe the following approach 
has merit: