hedging a portfolio against a black swan

Trader13 said:
I posted earlier in this thread.
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OK ..... I assume below is the post you are referring to.

Trader13 said:
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.
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  • Buying DOTM puts.
  • and/or
  • Short some stocks.

But if the "black swan" event never happens your solution could get very costly.



:)
 
OptionGuru said:
... But if the "black swan" event never happens your solution could get very costly.
:)
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Well, I addressed that point wrt buying DOTM puts. So my better recommendation is to trade market-neutral with longs and shorts. This will hedge a black-swan event and more. My apologies for essentially repeating my previous post.
 
It still sounds like many posters expect such a black swan hedge to be EV+ or at least neutral. For me, that's not the purpose of a hedge. My strategy normally is EV+, and the hedge (while very likely EV- in itself, and therefore reducing my profits) should guarantee I would be able to continue the normal strategy indefinitely (in theory), and make sure I do not get wiped out by a black swan somewhere along the way. So it seems to me, if you do this, one should accept you'll continually bleed a bit of money and in exchange (again, only theoretically) you will always be able to keep compounding whatever happens.
 
A case can be made that hedging against a big drop in stocks is unecessary. 2008 was the opportunity for a life time to get rich. For those with some cash and/or bonds plus income coming in, a 2008 style collapse is an great opportunity to get rich and retire
 
Daal said:
A case can be made that hedging against a big drop in stocks is unecessary. 2008 was the opportunity for a life time to get rich. For those with some cash and/or bonds plus income coming in, a 2008 style collapse is an great opportunity to get rich and retire
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not unless you are in cash b4 the crash. 99% of ppl rode the market all the way down. market timing nearly impossible. no one can do it consistently
 
stepandfetchit said:
Earlier, I posted a basic example hedge trade from a presentation by Don Kaufman of Theotrade. Here is a good critique of that Risk Twist spread trade. "https://www.evernote.com/shard/s2/sh/ac42dd1b-1651-40b1-8117-534aa35b6f1b/1c9f0ee921cd1102". -- There are some opportunities for improvement evidently! ;-)
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Excellent work stepandfetchit. I have been looking at portfolio hedging for an SPX/ES option book (for an short premium portfolio) and am coming to the conclusion that either simple long vix call OTM or long puts on /ES or SPX is the only way to go. For protecting against 10% or 20% moves or more.

In your opinion what is the best hedge for such a situation?
 
kcgoogler said:
Excellent work stepandfetchit. I have been looking at portfolio hedging for an SPX/ES option book (for an short premium portfolio) and am coming to the conclusion that either simple long vix call OTM or long puts on /ES or SPX is the only way to go. For protecting against 10% or 20% moves or more.

In your opinion what is the best hedge for such a situation?
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I am NOT the author of that report, I merely passed it on, as it seems to have legs.
I am checking back with the author to see if he will permit disclosing his name here.
 
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