I think what you are describing is hedging in a context of actively trading. If you are trying to hedge black-swan, you are not going to worry about normal 10-15% corrections. You are hedging for a disaster, which would be done with lots of DOTM options, imo. Being delta neutral all of the time in case black-swan happens will make you negative returns, unless you are actually trading your hedges actively. Just opinion.
that was my conclusion. Hedging spx against a portfolio of single stocks costed me a ton in rallies and when the sell-offs happend the hedge only performed relative to the book about 50percent of the time.
Isn't there a comparatively simple answer to that? Monetize the hedge when you exit the hedged position (or scale both down, proportionally). If a new hedge would be too expensive then keep a small position that doesn't need to be hedged. I.e. the active decision is to what extent to keep the hedged position (especially in face of risen hedging costs), not whether to monetize the hedge. Just theorycrafting on my part, I've never hedged tails this way. At the end of the day I think the main point is to be able to sleep at night and know that, if the skies are clear today with good weather predicted for tomorrow, but a tornado unexpectedly shows up during the night and tears down the whole neighborhood, you will be fine. What happens beyond that is more in your control than that first crucial unexpected bad event.
For the average 401(k) investor, there are no good passive hedging strategies. Diversification is about the best you can do. There are funds nowdays that will do the active hedging for you, but fees are high, and I can't attest to any of their track records. Bonds are still the best non-correlated asset class to diversify against stocks. The old 60/40 stock/bond portfolio still has merit in many cases.
That sounds smart, because VIX always goes back up briefly, one of the few repeatable patterns. I'm long UVXY down here bc I expect a VIX spike within a week or two.
Yes except with DOTM options, it won't kick in and provide its hedging function until the adverse move against your investment is very or extremely severe. By that time, the investment value of your portfolio would have already deteriorated a great deal so whether it's hedged or not doesn't make much difference anymore. Imagine if you long in SPY and SPY drops 35%, your investment in SPY would've already dropped 35%. If your DOTM put option has a strike price that's 35% lower than the purchase price of your SPY, what good is that going to do? It's ITM now, sure but how much has its option price appreciated when it's barely ITM? And how much are you going to get when you exercise it? You won't even cover its purchase price. So this is why I say, hedging for black swan is really not worth it with DOTM options. If you are really worried about a black swan, either reduce your investment and diversify with other investments or cash out the equity investments and put it in extremely low-risk investments altogether. If you are actively trading, then you need to hedge with instruments that will ideally render you delta-neutral or at least close to it. It is doable.
But that will have to also depend on where you live. If you live in a tornado-prone area, then yeah it's worth it to buy tornado insurance and/or sleep in tornado-proof shelters which are all effective hedging strategies against potential tornados. But if you don't live in tornado-prone areas where there is very little probability of tornados happening, then it's not worth it to sleep every night in a tornado-proof basement even though the tornado is a black-swan event that can have disastrous consequences.
If you planning for Black Swan, you will spend a great deal, perhaps more on decaying options than keeping underlying. Maybe it is time to exit your position than worrying how to hedge. I took profit of 60% of position from 2009, so only have 10% left. I expect market to go down, but have thought this way for 4 years. But want to transfer funds to long term futures and option spreads. You can always hedge with shorting ES contracts then hedging those. If market tanks, dump ES options, if market goes up, exit out of ES contract.