During the 1987 stock-market crash, portfolio insurance was widely blamed for intensifying the sell-off.
Portfolio insurance was a computerized investment strategy designed to limit losses by selling stock-index futures as share prices declined. The strategy was intended to imitate a protective put option, reducing a portfolio’s exposure during a falling market.
On October 19, 1987, heavy selling overwhelmed markets worldwide. As prices dropped, portfolio-insurance programs generated additional sell orders, while other investors and traders also rushed to reduce risk. This feedback loop is one reason the crash became unusually rapid and severe.
Portfolio insurance was not the sole cause of Black Monday. Researchers also cite high valuations, investor anxiety, market-structure weaknesses, and the difficulty of coordinating trading across linked markets. The strategy’s role remains a subject of debate, but it became the best-known example of how automated selling could amplify a financial panic.