Black Swan Hedging
- Thread starter TazTheLaz
- Start date
That is a very unlikely scenario. If you are going to bet on unlikely scenarios, you are not going to do well with any strategy, imho.
I don’t think it’s that easy. One of the difficulties in hedging is actually monetizing your hedge. Are you going to close your hedge after 10% drop? That’s not really black -swan. So after 25%? Are you going to re-buy your hedges in case there’s another 25% drop at the time volatility at its highest? What if we have a V-shaped bounce and your hedges expire worthless but then market drifts down? You got to be a great options trader, imho.
The broad market took 25 years to recover from the 1929 crash. If you were lucky to hold certain individual stocks, you could have recovered sooner, on average I believe 12 years for many companies.
how much are you will to pay to offset losses in those rare events?
Well the most ideal hedge is one that is delta-neutral. But just like any investment, you can't predict the future. You can only ensure that when your investment is losing value, you won't be losing your capital along with it, that's it. Whether it's going to bounce back in the future is not something that you can control nor predict. It may bounce back to be V-shaped but it may not. What's important is your investment right now is adequately protected. What I do is when my hedge is ITM, I close my underlying and the ITM option at the same time. And since I am delta-neutral so I don't lose much, at least not an amount that I won't be able to recover from my future profit. And then I reassess the market and go back into the market with my new hedge and hope for the best and rinse and repeat.
The bottom line is you don't lose more than you have made. And that's the purpose of hedging. Yes it can be challenging at times but I find if you did your homework right and studied the market well and trade with a solid plan that covers all scenarios, you should be able to make more than you lose.
It did, but everything is totally different nowadays. We recovered much more quickly from the 87 crash, then 2001, then 2008. Since the late 80's, the public has a collective growing balance in defined contribution plans which are HEAVILY invested in equity markets. When the market drops today, people check their 401Ks and start losing confidence, pulling back spending, etc... and it cascades downward - if the Fed allows that - and lately they haven't.
I'm not saying we won't have drops and crashes. We will. Since the mid 1980's the Fed has completely reworked their toolbox to keep the market floating along. Lots of people have lots of opinions about whether that's good or bad, but I think it's true that any crashes will be short lived. In the last drop around 2009 when the S&P fell about 50% lots of people just hung on and got it all back in a few years, and then it doubled again from there and has nearly doubled again since.
If you are just long equities or indexes, I firmly believe that "hanging on and riding it out" is a decent strategy today for lots of people.
That is exactly what happened to someone who bought Nasdaq high at the dotcom bubble 2000-2001. Donˋt know if it is now the right time to invest a huge amount of money in Spy or QQQ. Indexes went nearly parabolic since 03/2020
Black swans are so rare and so unpredictable that they're arguably not worth hedging against.
But they are worth anticipating and reacting to - anticipating by following trends and setting stop-losses, reacting by closing exposed positions and getting into cash or alternative trades.
Following trends eliminates risk from about 75% of major market moves, including 9/11 and the EUR/CHF crash.
But they are worth anticipating and reacting to - anticipating by following trends and setting stop-losses, reacting by closing exposed positions and getting into cash or alternative trades.
Following trends eliminates risk from about 75% of major market moves, including 9/11 and the EUR/CHF crash.
maybe that person should have not bought the nasdaq high instead of trying to black swan hedge a portfolio that was long “eyeballs and short revenue”