Currently I am long the e-minis, with a large calendar spread i put on at the 2400 strike a few weeks ago that is serving me well so far. However this strategy will not serve me well in EXTREME melt downs, I know Taleb and Spitnagel like to buy the tail risk and was even mentioned that they buy the delta .01 or delta .02 front months. However i cant see this being done with out putting on some sort of a back spread to finance those puts. IF i want to replicate something similar to this trade how should i go about doing this? Should my near strike be atm or otm? I would also like some more vega exposure without giving away to much theta. All opinions would be helpful THAK YOU!!
There is more than one way to finance the debit of buying options. One method Taleb has used in the past was to buy t-bills and use the interest income to purchase options. Look into his barbell strategy further to see what specifics he is currently recommending.
what he talks is all pretty useless; randomness is randomness defining the risk will do a better job than making the OTM curve up
There are some excellent articles by Chris Cole you should check out that do the same thing. He runs Artemis Capital. He has written some very long detailed papers. I don't think you should try to replicate this and here is why. Both Cole and Taleb or Spitznagel really, get paid for providing a service to wealthy investors who are "already" long the market. They are really to pay the tail hedgers for protection of their capital. They basically are synthetically long calls on their net worth (i.e. long stock, long puts =long syn call). So they get paid for providing the services, not necessarily for the performance. Although in Cole's case he says he has made money the last 3 years during the bull market. But regarding specifically the strategy, most market players who do this are looking for "value". They are not simply buying OTM puts. They are looking for OTM puts that are undervalued. And they may NOT be in the ES. You need to think outside the box. It could be OTM calls in Gold, OTM calls Bonds or even far out of the money options on the 2/10 flattener. It depends where the value is. Many on here mistakenly believe that Taleb made a killing in 1987 on S&P puts. That is not correct, he made his killing long DOTM puts on Eurodollar options. He believed they were mispriced and would have made money over time even if the market had not crashed. The crash was luck, but his trade could have still profited over time if those puts returned to fair value.
That's well and good, but doesn't cleanly hedge the equity risk institutional investors face. Gold and bonds needn't go up in a stock decline.
That's the point. These guys get paid to find those areas. Any Tom, Dick or Harry can simply hedge their portfolio without paying the 2/20 on their own. The idea is to find where the value is. Shit, their is an ETF called "HDGE" that simply shorts over priced stocks if you wanted to take that plain vanilla approach.
https://finance.yahoo.com/quote/HDGE/holdings?p=HDGE Here are their top 5 holdings which make up about 19% of their portfolio.