"Our analysis demonstrates that put options  low prices during calm periods give the illusion of value. Buying an option is not a bet that realized volatility will increase; it is a bet that realized volatility will increase above the option s implied volatility. Buying an option is expected to lose money even when volatility is low and rising if the spread between realized and implied volatility is sufficiently high. The possibility of black swan events is an often-quoted justification for the large observed volatility risk premium. We believe the frequency of black swan events required to rationalize option purchases is unreasonably large given our knowledge of extreme events. More importantly, we believe investors are best served by integrating their beliefs regarding black swans to their aggregate asset allocation as opposed to opportunistically purchasing portfolio insurance at low, but not cheap, prices. This is especially the case for the majority of investors who have limited ability to stick with a hedging program that loses money for years while awaiting an episodic payoff. In conclusion, if concerned about longer-term drawdowns, solutions (such as managed futures) may not be viable for one-day events, but may help with longer-term drawdowns."
 

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