Let's use the whole market for another example.
SPY is about 80. You can buy a Dec09 put for about 10.75. So 9 months of protection costs you 13%.
You own puts and the underlying stock. At the end of the year, if the market has gone down, you have lost 13%. If the market goes up 13%, you break even. And if the market goes up 50% you make 37%.
The only time you do better with the puts is when the market drops more than 13%, and it is only a big help if it drops substancially more than 13%.
Making bets every year that the market will go down more than 13% is not a great longterm strategy, IMO.
Even during the last major drop, the returns were only -9.1,-11.9,-22.1 for 2000, 2001, and 2002. So holding the index through that drop would have left you with 100*.909*.88.1*.779= 62.4% of your money left after the decline.
Buying the puts would have left you with= 100*.87*.87*.87= 65.9% of your money.
Not exactly the great insurance I'm looking for.
Granted, puts are very expensive right now, because the volitilaty has been very high recently. There may be times when this makes sense to use, but in general, I think its a bad bet.
You're probably better off buying one of those indexed annuities
Tell that to the people who go to casinos.
Options are a negative-sum game. Spreads and transaction costs guarrentee that, as a group, people buying and selling options will lose money.
Yes, if the stock moves a lot the put strategy is fine. How about when the stock moves up 11% in a year and you end up with zero return? How about when it drops 5%, and you end up with a -11% return?
Honestly, who do you think is going to be further ahead in 20 years, the person who buys puts each year for 11% of their portfolio's value, or the person who takes that 11% each year and buys a CD to hold along with his stocks?