What is a Greenspan Put
Greenspan put was a trading strategy popular during the 1990s and 2000s as a result of certain policies implemented by Federal Reserve Chairman Alan Greenspan during that time. Greenspan was chairman from 1987 to 2006. Throughout his reign he attempted to help support the U.S. economy by actively using the federal funds rate as a lever for change which many believed encouraged excessive risk taking that led to profitability in put options.
BREAKING DOWN Greenspan Put
Greenspan put was a term coined in the 1990s. It referred to a reliance on a stock market put option strategy that if utilized could help investors mitigate losses and potentially profit from deflating market bubbles. The Greenspan put suggested that informed investors could expect the Fed to take predictable actions that made put option derivative strategies profitable in times surrounding a crisis.
Greenspan took on the Chairman role with the Fed’s first actions following the 1987 stock market crisis. Greenspan lowered rates to help companies recover from the crisis and set a precedent that the Fed would intervene in times of crisis. This assumption of intervention and support from the Fed induced risk taking that made put options more popular as investors saw inflated valuations.
In the early 1990s Greenspan instituted a series of rate decreases lasting until approximately 1993. Through Greenspan’s reign there were also several instances where the Fed intervened to support exorbitant risk taking in the stock market including the savings and loan crisis, Gulf War, Mexican crisis, Asian financial crisis, the Long-Term Capital Management crisis, Y2K and the bursting of the dot com bubble following its peak in 2000.
Overall, the Fed under Greenspan’s direction was known for supporting a Greenspan put era that encouraged risk taking but also saw inflated prices that made put options more valuable. The effects of the Fed’s rate reductions also helped investors to have the ability to borrow funds more cheaply to invest in the securities market which added to an environment of excessive risk taking.
On February 1, 2006, Ben Bernanke replaced Alan Greenspan as the Federal Reserve Board chairman. Bernanke followed a similar strategy to Alan Greenspan in 2007 and 2008. The combination of rate reduction timing implemented by Alan Greenspan and Ben Bernanke has been generally attributed to supporting excessive risk taking in the financial markets which many believe to have been a catalyst contributing to the proceedings of the 2008 financial crisis.