In practice, a portfolio insurance strategy uses computer-based models to analyze an optimal level of stock-to-cash ratios in various stock market conditions.
As the market drops, a portfolio insurer would increase cash levels by selling index futures, maintaining the target ratio.
This combination of buying and selling of index futures is done in an effort to maintain the proper stock-to-cash ratio demanded by the portfolio insurance model or strategy.
[4] Both portfolio insurance and index arbitrage are commonly cited as two types of computer program trading which contributed to the stock market crash of October 19, 1987, also known as Black Monday.
[1] Later analysis that year by a Committee of Inquiry under the Chicago Mercantile Exchange brought forth supporting evidence that the market selloff was more heavily influenced by larger forces such as mutual funds, broker-dealers, and individual shareholders.