Why are options so expensive compared to home insurance?

[M.W.]

Differences in volatility.

It costs about $1200 per year to protect a $500k home so why does it cost 62k to protect a 500k stock position?

500k in AAPL =5000 ATM Sep2024 put contracts @ .59 delta = 2950 put contracts @ $21= $61,950

???

 

[murray t turtle]

It costs about $1200 per year to protect a $500k home so why does it cost 62k to protect a 500k stock position?

500k in AAPL =5000 ATM Sep2024 put contracts @ .59 delta = 2950 put contracts @ $21= $61,950

???

%%
LOL Insurance= much cheaper if bought 6 or 12 month;
much more expensiVe by the month.
Doesnt cost 62k to protect a liquid basket like $500 of SPY;
maybe does with options .
WOW i wonder why so few funds or none would put it all in a single tech stock??LOL
Most also limit payout on guns + electronics or ca$h;\
Progressive Property + Causality[PROgressive HI] save$ a lot with loUsy customer serVice; + like State Farm, charges drunk drivers more/ young drivers more/ older guys more to insure silverLOL .................................

 

[hilmy83]

5000 ATM put contracts @174 = $86.5 million in stock...??

Yea, I don't understand the calculation either.

If I had 500k shares in AAPL, that would mean 86.5 mil in value.

But let's keep it simple. 100 shares of AAPL is about $17100
I want to insure any downside, so I would buy ATM put right? Which is currently $13.83 or $1383 premium

So that would mean about 8% of the share value. But your insurance not going to pay out like an option would if value goes down due to disaster, you payout is essentially around $15k if it's a total loss

So, option insurance is more leveraged in your favor.

But maybe I'm looking at this wrong.

 

[hilmy83]

Yea, I don't understand the calculation either.

If I had 500k shares in AAPL, that would mean 86.5 mil in value.

But let's keep it simple. 100 shares of AAPL is about $17100
I want to insure any downside, so I would buy ATM put right? Which is currently $13.83 or $1383 premium

View attachment 324370

So that would mean about 8% of the share value. But your insurance not going to pay out like an option would if value goes down due to disaster, you payout is essentially around $15k if it's a total loss

View attachment 324372

View attachment 324371

So, option insurance is more leveraged in your favor.

But maybe I'm looking at this wrong.

Where I live, insurance premium on $500k home would be about $4000.

Lets say I just buy shortest expiration on AAPL for Oct6, which is $113. x 4 (4 different purchaes s i need to cover the month? assuming all are equal) = about $500 premium.

So it's cheaper for to insure your shares than your house......i think.

 

[MarkBrown]

The comparison between home insurance and stock option protection (often referred to as a protective put strategy) touches upon the fundamental difference between insuring tangible assets and financial assets. Here are some factors to consider:

1. **Nature of Risk:**
- **Home Insurance:** Protects against rare events like fires, natural disasters, or theft. While these events can be devastating, the probability of them happening in any given year is relatively low.
- **Stock Protection:** Stock prices can be very volatile. The likelihood of a significant stock price drop in any given year is much higher than, say, a house burning down.

2. **Duration of Coverage:**
- **Home Insurance:** Your $1200 premium typically covers a year of various risks.
- **Stock Protection:** The protective put you're referring to expires in September 2024, which is typically shorter than many home insurance policies. Options expiring sooner would be cheaper, but then they'd provide protection for a shorter period.

3. **Extent of Coverage:**
- **Home Insurance:** There are often deductibles, limits, and exclusions.
- **Stock Protection:** A protective put provides a right to sell the stock at a predetermined price, regardless of how low the actual market price goes.

4. **Market Mechanics:**
- **Home Insurance:** Premiums are based on actuarial tables and the historical cost of claims in an area.
- **Stock Protection:** Option prices are determined by market forces and are influenced by factors like volatility, time to expiration, interest rates, and dividends. When markets perceive higher risk (higher implied volatility), protective puts become more expensive.

5. **Purpose of Coverage:**
- **Home Insurance:** Purely protective. You're not hoping for a disaster; you're guarding against financial loss.
- **Stock Protection:** While it's protective in nature, buying puts can also be speculative. Some investors buy puts hoping the stock will drop, allowing them to profit from the option.

6. **Valuation Dynamics:** Stocks, especially high-profile ones like AAPL, are affected by a myriad of factors, including global events, macroeconomic shifts, and sector trends. These factors can introduce volatility and risk, which gets priced into options.

7. **Liquidity and Market Demand:** The demand for protective puts increases in uncertain markets or when investors expect a downturn, driving up the price.

In essence, while home insurance and protective puts serve as protection mechanisms, they operate in different realms with different risk profiles, durations, and market dynamics. When considering protective strategies for a stock portfolio, it's essential to weigh the cost of the protection against the potential benefits and peace of mind it offers.

 

[Quanto]

It costs about $1200 per year to protect a $500k home so why does it cost 62k to protect a 500k stock position?

500k in AAPL =5000 ATM Sep2024 put contracts @ .59 delta = 2950 put contracts @ $21= $61,950

???

You can get such a protection for a stock position virtually for free (ie. will cost zero ) by selling ATM Calls and buying ATM Puts.
This just freezes the value, ie. no loss possible, but also no profit possible.

 

[wxytrader]

You can get such a protection for a stock position virtually for free (ie. will cost zero ) by selling ATM Calls and buying ATM Puts.
This just freezes the value, ie. no loss possible, but also no profit possible.

Yeah that would be like saying you can insure your house but it won't increase in value while you have insurance.

 

[wxytrader]

The comparison between home insurance and stock option protection (often referred to as a protective put strategy) touches upon the fundamental difference between insuring tangible assets and financial assets. Here are some factors to consider:

1. **Nature of Risk:**
- **Home Insurance:** Protects against rare events like fires, natural disasters, or theft. While these events can be devastating, the probability of them happening in any given year is relatively low.
- **Stock Protection:** Stock prices can be very volatile. The likelihood of a significant stock price drop in any given year is much higher than, say, a house burning down.

This is the crux of it. What is the cause of the volatility? It's artificial. I mean you don't check how much your house has gone up or down in the past week...the insurance also doesn't adjust for it either. The people offering the "insurance" in stocks have a stake in the market itself. It would be like if the home insurance people controlled the housing market prices.

 

[destriero]

Bear risk reversal. 20-25D short call. long put. You'll have to pay a debit but it converts the portfolio into a synthetic bull vertical (optimally-hedged).

Using ATR and other analogies is pointless. If it's overpriced then where are the sellers? Would you have wanted to short puts at yesterday's close?

Options ARE volatility. OTC MMers price structures in vol not premium.

 

[wxytrader]

Where I live, insurance premium on $500k home would be about $4000.

Lets say I just buy shortest expiration on AAPL for Oct6, which is $113. x 4 (4 different purchaes s i need to cover the month? assuming all are equal) = about $500 premium.

So it's cheaper for to insure your shares than your house......i think.

View attachment 324375

So $500 for 3 days of insurance? 365/3=122*500=60,833