Greenspan put

A ‘put’ is a type of option contract that increases in value as the price of the underlying asset falls. Puts are often used by traders as insurance or to hedge their positions: they may go long on a stock but also take a put option on it to reduce their losses should its price fall. This effectively limits their downside.

In the 1990s, the market came to believe that the US Federal Reserve, then chaired by Alan Greenspan, was effectively providing the same sort of service for the market as a whole by guaranteeing that it would underwrite it at a certain level. Hence the phrase ‘Greenspan put’. This belief was vindicated by the Fed’s prompt action in cutting rates in tricky moments, such as in the wake of the LTCM hedge-fund crisis, and by its willingness to keep rates low throughout the 1990s.

• See Tim Bennett’s video tutorial: What are options and covered warrants?

Merryn

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