CPPI and DPPI hedging strategies from the seller's perspective

Following my recent survey on the downwards trending power price and possible actions when your position has already experienced severe loss I would like to evaluate responses and then also discuss two more strategies (of many possible): CPPI and DPPI.

Survey results:

1. at the time of survey (price of 75 EUR) the majority of people (58%) would not sell the long position and rather wait for higher prices.The "hold and wait" strategy is plausible when considering that the price of 75 eur is very close to 2 year low of 71 EUR, in fact 75 eur is in a lower 2% percentile. And the chance that the seller is going to lock almost the highest possible loss is not negligible and hard to justify to your shareholder.
2. 25% of respondends would get prepared to reduce their position by 10% every time the price declines by 10% (from 75 eur), i.e. successively selling at 67.5 eur; 60.75 eur; 54.68, etc. The strategy is similar to "hold and wait" however a set of stop losses is agreed and shareholder can rely on 50% being sold at a price of not worse than 37 eur leaving enough room for upside. This strategy can be further refined to dynamically change stop losses shall the price experience local increase, e.g. it can hit 67.5 eur, then go up again to 85 eur from where new stop losses will be set 10% lower than 85 and so on.
3. 17% of respondends would prefer to set a single SL at a historical low of 71 which occured at the end of February leaving a distance to SL of around 4 eur (5.5%). This strategy is very interesting from various perspectives:i) first of all, it seems logical that if my long position was already marking at 71 eur and was not closed why would I want to close it at 75 eur.ii) from chart technical perspective double bottom price seems a justifiable SL limit from which the price can fall even further.iii) a single fixed SL is less prone to operational errors

CPPI and DPPI:

Portfolio insurance strategies are designed to protect position from significant losses in the markets while still allowing for participation in potential gains. Two popular methods are Constant Proportion Portfolio Insurance (CPPI) and Dynamic Proportion Portfolio Insurance (DPPI).

The CPPI strategy involves adjustment of the position based on the difference between the current position value and a predetermined floor value, known as the “cushion.” This method creates option-like payoffs without using actual options and is favored for creating protected funds or synthetic derivative products.

DPPI is an extension of CPPI. It adjusts the multiplier making the protection more dynamic. This can potentially offer better protection in highly volatile markets but also involves more complex calculations and frequent rebalancing.

Let's briefly look at these strategies how they would perform if implemented at a time when position was opened.

Parameters set 1: target floor price at 5.5% below starting price, risk factor 10%:

Parameters set 2: target floor price at 10% below starting price, risk factor 10%:

In both cases given a strong downward market trend CPPI and DPPI hedged portfolios would be fully hedged (equivalently closed) by now but at a quite high prices of about 125 eur, in case of DPPI with 10% target floor price even at 150 eur.

In June I will post an update of how different strategies perform using more recent prices for the same product.

Post your comments/ questions, shares are welcome.