What would you regard as acceptable disaster insurance?

Well, bear in mind that I'm thinking of "what people are wiling to pay for hedging a financial portfolio against a disastrous fall in prices". For those closer to falling bombs there is entirely different type of disaster to consider.

On the financial front:

Occasionally the market drops a fair bit, gradually or suddenly. Sometimes the months before that fall are characterized by things like valuation levels considerably higher than usual, rising interest rates, bubble behaviour in certain areas of the markets. As the time draws nearer you sometimes see poor market breadth: more stocks hitting new lows than new highs, for example. At some point it will be more than 3-5 months since a new high was hit, (after that market returns are on average weak), so no recent evidence that the prior bull market is still alive. It has been about 2.2 months so far. None of these omens is definitive, you can have those sort of conditions for ages, but they are certainly things that are frequently seen before market tops, and they are certainly things that have some parallels in this year.

So, maybe a bit of a speculative "lottery ticket" purchase of insurance might pay off. Not to hedge a portfolio...who sensible cares much about the market to market value of a portfolio?...but just as a way to make a buck, maybe.

I would assume that whatever you spend on this will more than likely be a total loss. But, with a bit of luck, you might be able to pick some things with potentially high payoffs, more than enough to make it worthwhile to place a wager.

My thinking was buying out-of-the-money put options against various individual stock names that seem likely to crop more than average if there are any serious problems seen in the markets. Added during bullish moments over the next couple/few months, gradually. With this strategy (unlikely simply shorting stocks) you don't have to be right on all your picks...you lose a small amount on the few that rise, but you can make quite a lot, often 10x, on the ones you pick correctly.

I tend to buy such put options in pairs. For example, buy one 20% below current price and an equal number at (say) 40% below, against the same security expiring at the same date. I don't really want to wager on drops of more than 40%, they are a bit of a long shot, so I can use the premium from those low-strike ones to help pay for the high-strike ones. At first this sounds insanely risky, who would write put options? But it's entirely safe so long as you close them at the same time. If/as your low-strike ones start losing money, the high strike ones will be making more money. So never close the high strike ones first.

I sometimes buy at multiple strikes, at least two contracts at each strike. The time value of an low-strike put option is at its highest the first time the stock price falls to that strike, so I tend to close one of each pair at that point, so the remaining one is "free" insurance after that. Since this involves trying to make a profit on the time value, I tend to pick quite long dated put options for this kind of play--a certain percentage jump in time value is nicer if the time value itself is big. Then close all remaining ones at all strikes fairly quickly when you have a hunch that the bottom is in, even a temporary bottom. There is nothing more annoying than making a mark-to-market bundle on this kind of put option, then giving it all back when the market rebounds.

Note, to repeat, you'll probably lose all the money you put into such a strategy. It's probably not prudent capital allocation. Never stops me, though, because I'm slow learner. On rare occasion, it is a lot of fun...September 2008 was among my all time best months ever because of my hedging. The reason I like it is that it's a thing that pays off with ready cash precisely when it's a great time to go shopping for great stocks on sale.

Jim