hedging a portfolio against a black swan

[bjw]

Puts are waaay overpriced...

Yeah, I agree. But isn't that generally always the case with insurance? You over-pay, and will likely never need it, but if you do, it saves you.

I'm not particularly bearish or bullish right now, and my portfolio isn't either, but obviously there's a weakness; A, say, 40%? downward move could blow up my account, whether it's now or in a number of years. Of course, I could just adress this weakness by de-leveraging, switch part to currency, gold, whatever, indefinitely, which obviously I'd rather not do as I believe what I do is profitable. Or I don't deleverage & when the (maybe not so) unthinkable happens I make sure I'm covered, but at a high price. Obviously, I'm still investigating what's ultimately best here..

 

[bjw]

I suggest you apply a Dalio 'risk parity' type approach.

Thanks. I'm gonna google that

 

[stepandfetchit]

bjw:
Here is a link with some discussion on the characteristics and construction of a BSH (Black Swan Hedge) that may be interesting. "

"

 

[Rationalize]

US DOLLARS



Is the best way to prepare for a "black swan".

Buy index correlation
If you have no existing position to lay off.

 

[Nickko344]

See a backtested history of VXX to see why buying puts for protection is a bad idea. Ignore that crap about Taleb and blackswans. Puts are waaay overpriced...many academic papers have been written on the matter and all conclude puts are overpriced relative to the risk of a crash. If you are bearish, there are better strategies than wasting money on overpriced put protection:

buy treasury bonds

sell some stock

sell a call option

move to a low-volatility fund or a consumer staples fund

sell out of money puts instead of being long euaities


/QUOTE]

Puts are expensive AFTER the event has happened. When buying puts , you have to buy them as "protection" or "insurance " before the "black swan" to be really effective .

Selling calls is a Negative Vega trade ...again , great if the Vol popped and is coming back down...but if you sell then it pops...yikes!

 

[tradelosses]

Puts are expensive AFTER the event has happened. When buying puts , you have to buy them as "protection" or "insurance " before the "black swan" to be really effective .

Selling calls is a Negative Vega trade ...again , great if the Vol popped and is coming back down...but if you sell then it pops...yikes!

a sold call will almost always fall if the underlying falls

 

[Rationalize]

This thread just got boring
Signal to noise ratio....

 

[tradelosses]

Yeah, I agree. But isn't that generally always the case with insurance? You over-pay, and will likely never need it, but if you do, it saves you.

I'm not particularly bearish or bullish right now, and my portfolio isn't either, but obviously there's a weakness; A, say, 40%? downward move could blow up my account, whether it's now or in a number of years. Of course, I could just adress this weakness by de-leveraging, switch part to currency, gold, whatever, indefinitely, which obviously I'd rather not do as I believe what I do is profitable. Or I don't deleverage & when the (maybe not so) unthinkable happens I make sure I'm covered, but at a high price. Obviously, I'm still investigating what's ultimately best here..

home insurance is waaay cheaper relative to the value of the home than put insurance is relative to the value of the portfolio . Home insurance pays out everything in the event of a crisis...with puts you have tp buy them 'in the money' for the same effect, which is the most expensive

 

[Nickko344]

a sold call will almost always fall if the underlying falls/QUOTE]

True , but not a good hedge. Especially not a good portfolio hedge

 

[Trader13]

To protect against a Black Swan (systemic) event in stocks, which is a sudden and extreme move to the downside, buy DOTM Puts. When you get very Deep OTM, they are not too expensive. But a Black Swan event occurs very infrequently, so these puts will usually expire worthless which results in a cumulative cost over time that adds up.

If possible, you're better off trading a long/short market-neutral approach so you're protected against more common moderate-sized moves to the downside. In this case, the rare Black Swan event gets taken care of, too. Options not necessary, just take short positions in the weakest markets in the asset class you're trading.