Which puts to buy for tail risk hedging?

K

Kust

I have read the paper "Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities" by Chitpuneet Mann, Mark Spitznagel, and Brandon Yarckin.

They define tail risk event as a down 20% move in the S&P 500 over a month. They recommend holding SPY puts with strike roughly 30-35% below spot and 11-12 weeks to maturity.

Are these parameters the best? In other words, which options appreciate the most in case of the tail risk event as defined above?

How to determine it quantitatively? I have some Python skills but no access to the paid data.
 
I use puts which are about 13% below spot, 28DTE. These puts have cost me around 17K per 100K invested from 2013 till now. So approx 2K per year. Biggest win was in week of 18 march 2020, 35K per 100K invested profit.

During low vola you can also buy low delta calendars, to minimize your theta loss.
 
also consider volatility products like VIX...

whatever you decide I would recommend buying much further dated than you think you will need and selling after you are through with them.

Example: you think the next month will be bad...buy 3 month options and sell after a month. Much less expensive this way but also less delta hedge. IMO it is worth it to go this route considering most OTM hedges expire worthless.
 
Why don't you look at Orats and run some backtests??

Kust said:
I have read the paper "Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities" by Chitpuneet Mann, Mark Spitznagel, and Brandon Yarckin.

They define tail risk event as a down 20% move in the S&P 500 over a month. They recommend holding SPY puts with strike roughly 30-35% below spot and 11-12 weeks to maturity.

Are these parameters the best? In other words, which options appreciate the most in case of the tail risk event as defined above?

How to determine it quantitatively? I have some Python skills but no access to the paid data.
More...
 
Kust said:
I have read the paper "
...
They define tail risk event as a down 20% move in the S&P 500 over a month. They recommend holding SPY puts with strike roughly 30-35% below spot and 11-12 weeks to maturity.

Are these parameters the best?

How to determine it quantitatively?
More...

Their recommendations were probably results of the stats at the time they wrote the book. Numbers that'll likely help you are stats for historical slopes, positioning, of the OTM put strips wrt different expirations, and look for ways to improve your own realized vol forecasts, since that'll be the key to your long vegas getting paid.
 
dorietrading said:
I use puts which are about 13% below spot, 28DTE. These puts have cost me around 17K per 100K invested from 2013 till now. So approx 2K per year. Biggest win was in week of 18 march 2020, 35K per 100K invested profit.

During low vola you can also buy low delta calendars, to minimize your theta loss.
More...

Did you sell once vol popped or hold to expiration?
 
zghorner said:
also consider volatility products like VIX...

whatever you decide I would recommend buying much further dated than you think you will need and selling after you are through with them.

Example: you think the next month will be bad...buy 3 month options and sell after a month. Much less expensive this way but also less delta hedge. IMO it is worth it to go this route considering most OTM hedges expire worthless.
More...

But the profit on 3 month vix options is lower.
On 18 march 2020 the 30 days vix was about 70. The 90 days vix future was about 50. Most recommend buying at 2month and selling at 1month.

And vix options don't give you margin relief as do SPY/ES/SPX put options do when you write these type of options. But you can protect stock with it.
 
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