How Do "Out-of-the-Money" Put Options Function as Tail Risk Insurance? ▴ Learn

How Do “Out-of-the-Money” Put Options Function as Tail Risk Insurance?

Out-Of-The-Money (OTM) put options are cheap to buy and gain massive value if the underlying asset experiences a sudden, catastrophic drop (a tail event). They provide a large payoff in the event of a market crash, effectively insuring a portfolio against extreme, low-probability losses.

The cost is the premium paid, which is low due to the OTM nature.

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