How to best prepare for black swan & other catastrophic events

Quote from empee:

You could carry out of the money puts or long out of the money calls on the vix as a hedge, as long as your overall performance could overcome these costs. Theoretically, these out of the money options should actually be profitable (but rarely) and enough to make up for the small losses you take normally.
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The Vix is an excellent suggestion. I watch it closely for my other trading, but have never traded it directly. I will investigate it further. Once again, the biggest question is how much is this "insurance" going to eat into the fund's performance. Thanks!

Daryl
 
I've recently started using puts that are 10% away from the market. You have to have enough gain in your other trades to overcome these costs, obviously.

While I initially never expected to get any of the costs of the puts back, assuming they'd just decay to zero, I've found that if the last trade before expiry that I have is a short position, I can then sell the puts with a few days left on them, and recover some costs, which was a pleasant surprise. But I don't count on that, and most of the time it doesn't happen.

I don't worry about sudden upside moves, even though I may be short. I believe I can exit those in time without protection. (I use really wide stops)

You could also look at adding trading in gold, which has a low correlation to the Naz. Contracts are liquid, and options are available. I'm moving in that direction myself, for the same reason.
 
Quote from chanelops:

I've recently started using puts that are 10% away from the market. You have to have enough gain in your other trades to overcome these costs, obviously.

While I initially never expected to get any of the costs of the puts back, assuming they'd just decay to zero, I've found that if the last trade before expiry that I have is a short position, I can then sell the puts with a few days left on them, and recover some costs, which was a pleasant surprise. But I don't count on that, and most of the time it doesn't happen.

I don't worry about sudden upside moves, even though I may be short. I believe I can exit those in time without protection. (I use really wide stops)

You could also look at adding trading in gold, which has a low correlation to the Naz. Contracts are liquid, and options are available. I'm moving in that direction myself, for the same reason.
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Chanelops,

I have looked at Gold before for the same reasons. However, I did not pursue it, because many traders feel that the relationship between gold (and oil as well) and the markets has significantly changed and historical correlation is no longer pertinent. I am not stating this as a fact, because I honestly don't know if this is true or not. In either case, I am watching the two markets and giving them some time.

Thanks for the suggestions.

Sincerely,
Daryl
 
Quote from Worldcrusher:

My system trades equity options on only the Nasdaq 100 index. I would start the fund only if I could raise US$10 Million. I estimate the fund is scalable up to US $500 Million and would hope to be there someday.
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I presume your strategy is the naked selling of index premium.

Savvy investors will have little interest in your product.

Zero sum.
 
To better prepare for a black swan, I'd pay top dollars for an advanced prosumer DSLR camera - a black swan is rare luck to run into :) I'll take a full 4GB memory card load of photos...

Not sure about other catastrophic events...
 
Quote from Pa(b)st Prime:

I presume your strategy is the naked selling of index premium.

Savvy investors will have little interest in your product.

Zero sum.
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If this is the case, then Pabst is right. The other problem you'll have is that you have found a niche play that works well, but can not be a stand-alone strategy. For you to attempt to construct a portfolio around this strategy requires you to be an expert in portfolio theory and quantitative analysis. I assume this is not your forte, so your best bet would be to attempt to join a multi strat fund .
 
Build your HEAT threshold into your risk plan and then calculate your what-ifs and figure out how to make the most money with the lowest equity volatility.
 
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