Suppose one's portfolio currently consists entirely of 2,000 shares of SPY, worth $307.18 per share (value: $614,360). One is looking to de-risk the portfolio without exiting the market.
One can buy a call option giving one the right to buy SPY for $305 anytime before 1/21/22 for the price of $31.47/share. There are 807 days, or about 2.21 years till expiration. If the price of SPY is below $305 on 1/21/22, the option one paid $31.47/share for expires worthless. If it is above $305, the value on that date will be the price minus $305. One's maximum risk is the amount paid for the option, which is 31.47 / 307.18 = 10.24%. The maximum upside is unlimited, but will realistically be the performance of the S&P 500 over the next 2.21 years minus 10.24%. In the event of a correction, one's maximum loss hits a floor of 10.24%. In practical terms, this means if a severe recession/correction/bear occurs, one's retirement date is only set back by a year or two, rather than several years.
To control 2,000 shares of SPY, one would need to buy 20 contracts at a total cost of $62,940. The remaining $614,360 in the portfolio could sit in a money market account or bond fund earning a couple of percent to entirely replace the dividends one is missing out on.
Alternate allocation 1:
10.24% - 20 contracts SPY 1/21/22 305 call - $62,940
89.76% - short term cash / debt instruments - $551,420
If the market DID crash, this hypothetical investor could rotate the $551k plus interest back into stocks, having lost only most of the value from the $62,940k option allocation instead of, say 20-50% of the entire portfolio.
If the market DID NOT crash, this hypothetical investor could exercise their options to buy SPY in 2 years at a slightly lower price than is available today. Thus, by owning the options, they avoid the risk of the market running away without them, and having to buy at a much higher price later.
In other words, this alternative portfolio would enable the investor to sit out market risk for the next 2.21 years, while enjoying unlimited upside, no risk of the market running away without them, and with almost 90% of their cash available to pounce on any stock selloff. The relative cost of this protection is about 10.24% / 2.21 = 4.63% per year underperformance of the S&P 500.
This seems like not a bad deal compared to, say, a bond tent which could still lose much more than 10.24% and can be expected to underperform the S&P by a similar amount.
Kicker: To increase leverage, one could buy call options to control 150% of the number of shares one formerly owned. Then one's maximum downside would be 15.36% and the maximum upside 50% greater. You'd still be about 85% in cash.
Alternative allocation 2:
15.36% - 30 contracts SPY 1/21/22 305 call - $94,410
84.63% - short term cash / debt instruments - $519,950
Talk me out of it.