The demand for loss floors shifted from synthetic to actual puts after 1987

Evidence

It was not that the desire for what portfolio insurance promised a floor to losses vanished. Instead, those who wished such a floor seem to have turned from portfolio insurance’s synthetic puts to actual puts. Such puts were purchased either “over-the-counter” (by direct institution-to-institution negotiation) from investment banks or bought on organized options exchanges, notably the Chicago Board Options Exchange. — Donald MacKenzie, An Engine, Not a Camera, 890

Categorization

• XREF: Instrument substitution — turning to actual puts rather than the theoretically-derived synthetic equivalent — is a counter-example to strong performativity: practice reverted to a simpler, non-modeled instrument. — connects to: The 1987 crash taught options markets that unhedged put sales posed systemic risk — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 931; The 1987 crash permanently broke Black-Scholes fit with market prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 150

Broader Connections

• The 1987 crash permanently broke Black-Scholes fit with market prices #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 150
• The 1987 crash taught options markets that unhedged put sales posed systemic risk #corroborates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 931