Normal movements vs catastrophic movements in the stock market

TOMIC is willing to take the risk of normal moves in the market, such as plus or minus 5% price movement, but it reinsures the catastrophic risk beyond.
To reinsure this risk, TOMIC could buy out-of-the-money puts on the S&P 500 to protect against a large (25%) downturn in the market.

Another alternative to reinsure could be to buy out-of-the-money calls on the VIX. This assumes that a large drop in the S&P 500 would lead to a large spike in the VIX.

Depending on the pricing of the SPX puts and the VIX calls, TOMIC could use one or both options to offload the catastrophic risk.

This is one of the many passages and charts I find in books and articles on a daily basis. They span many disciplines, including:

I occasionally add a personal note to them.

The whole collection is available here.