Aside: The article mentions the "portfolio insurance" strategy and "program trading" as causes of the October 1987 crash. Basically, the portfolio insurance strategy was common in the 1980's and was typically implemented through program trading.<p>Portfolio insurance basically replicates a put option against some index, typically using index futures. The idea is that if you can't buy a put option against something, you can replicate it by creating a short position but you have adjust the size of the short position as the underlying price changes, aka a "dynamic hedge". Since the delta of a put option decreases as the price of the underlying falls, you have to short more (up to a point) when the price falls. There's nothing inherently wrong with this strategy.<p>However, if everyone (or a substantial portion of the market) is following this same strategy, it could be bad. This paper [1] reviews the commonly-point-to reasons for the October 1987 crash, and talks about program trading and the portfolio insurance strategy as potential causes, but also indicates that there were other issues at play. This other paper [2] looks at what happens when everyone, or substantially everyone, is following the same or similar strategy when it comes to portfolio management and/or trading strategies.<p>1. <a href="http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf" rel="nofollow">http://www.federalreserve.gov/pubs/feds/2007/200713/200713pa...</a><p>2. <a href="http://docs.lhpedersen.com/EveryoneRunsForExit.pdf" rel="nofollow">http://docs.lhpedersen.com/EveryoneRunsForExit.pdf</a>