UBS backtesting shows that Delta-hedged protective puts are better at handling "sharp drops + volatility spikes," but significantly less effective at protecting against slow declines. In rapid declines like those in March 2020 and April 2025, both actual and implied volatility surged simultaneously. Strategies could quickly accumulate returns through Gamma and Vega, reducing the negative carry of long-term traditional put holdings.
However, during the escalation of tensions in the Middle East in 2022 and March 2026, US stocks experienced more gradual declines, with volatility not rising sharply in tandem. UBS points out that in this environment, Delta-hedged puts are unlikely to provide significant protection because they weaken directional exposure, while Gamma and Vega do not generate sufficient volatility gains.
This means that portfolio insurance also needs to be matched to risk type: tail protection is more suitable for preventing sudden, sharp declines, while slow declines require additional strategies targeting shallow drawdowns or gradual adjustments.
