Do you do anything to manage tail-risk and if so, how? I am looking at the standard deviations concerned and comparing them to the min/maxâs over the period to assess any skew and how realistic the assumptions of normal distribution are. But Iâd be grateful for any further guidance or comments.
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Tail Risk
- Thread starter trading1
- Start date
Stay out of indices/ETFs and hedge with options on large caps near 100 beta and a flat vol surface. 25d risk-reversals are often flat to favoring calls. If you're overweight diversified oil producers, you could buy a deep otm put on XOM bought with interest on cash or possibly financed by a deep otm call.
Quote from atticus:
Stay out of indices/ETFs and hedge with options on large caps near 100 beta and a flat vol surface. 25d risk-reversals are often flat to favoring calls. If you're overweight diversified oil producers, you could buy a deep otm put on XOM bought with interest on cash or possibly financed by a deep otm call.
Respectfully I disagree re hedging w/ individual stocks vs indices/etfs. Say you hedge w/ a large cap (buy puts) and there is good news for that stock and it goes up 5% while the market along w/ the rest of your portfolio goes down 5% (or more). This can and does happen all the time and not just during black swan events. It is only mitigated b/c large caps aren't as volatile as small caps for the most part.
I agree you want to pay attention to the IV you're paying. Re the above large cap vs indices/etf debate, for the most part the IV of the former is much higher than the latter while offering no diversification.
It is a good idea as atticus said to buy the put w/ interest or from selling an otm call but only on an index/etf w/ less risk of an upside move in the UL.
Try hedging by looking at over portfolio beta. Else if still not comfortable, short a few similar stocks in the same sector, but the weaker companies.
Still not comfortable, like mentioned buy a few puts. If it spike in the opposite direction, reverse the 5 long puts, and short 10 puts instead.
Still not comfortable, like mentioned buy a few puts. If it spike in the opposite direction, reverse the 5 long puts, and short 10 puts instead.