I looked back at the 1927 and 1987 crash. All the major indices lost 1/4 to 1/3 of their values in a few days. In today's terms, that is similar to the Dow losing 3000 to 4000 points in a day. This may be a black swan, but if one is not careful, wealth accumulated in a life time can be wiped out in a day. This can happen, for instance, a sudden war and the markets are closed. Do any of you incorporate this rare possibility in your daily trading? If so, how do you do it? I plan to include this contingency plan in most, if not all, my trades.
I try to keep some balance between short and long positions. However, if I'm really feeling bullish then I may lean on the long side and keep shorts to a minimum, just as a partial hedge and vice versa.
trading is halted for an hour, i think, after dow loses 1000 points in 1 trading session. Better start panic selling ASAP after that
Hedge an Index. Maybe just a Put option. A reverse Ratio Backspread or better yet a "SlingShot" hedge. (see Cottles book).
if indeed its a black swan, one can never know when it will occur. However, since these are perported to be rare events, perhaps the premiums you pay to hedge aren't worth it. In other words, if you're paying the tax/insurance of hedging, maybe your better off just taking the 25% loss in a day when it comes. Of course, you're assuming the option sellers don't know of this and thus are selling you insurance below cost. My point being, I think a better strategy is to not use leverage and take the lumps when they (rarely) come. At least food for thought. The concept of "hedging" and acting like its costless is silly. (In terms of compounding profits lost to buying insurance). Do the math, of course it depends on when the next event happens, but depending on your rate of return, I think you'll find in short order that hedging (other than for psychological, emotion, investor reasons) isn't worth it.
You cannot plan for doomsday. But you can plan to have lots of cash available for when the shit hits the fan. Shit hitting the fan created wonderful opportunity...
I think Taleb ran a fund on the basis that the fund was planning for doomsday. I guess they're still waiting for their pay-off.
Buy some way otm Puts on any index. Cheap way to cover for armageddon. You may or may not make money during that period, but at least you'll recoup a lot of your portfolio's losses. To not own that sort of cheap insurance is just penny wise pound foolish.
I'd sell a doomsday hedge well before i'd buy one. Waste of money IMO. If things get ugly start liquidating.
hello guys, interesting discussion I sure dont want to take the lumps - working hard to get my portfolio up to where I am now, to see it withering down in 1 day - no way! Might be alright for day-traders, who are in front of the screen all day, but not for EOD-traders. Sitting on a lot of cash is not a good idea either - waiting and waiting and waiting and make what - 3% in your bank account? I dont like to buy the insurance either - it`ll cost you money and opportunity cost No, I`ve been given it some thoughts lately and I came to a very good conclusion. Why not have a stop sell order for ES futures say 2-3% under the present price. Globex is open almost 24 hours and if something happened at night or whenever, you`re right there in the market. In the meantime you dont own anything until it really happens and you only need a bit of money for the initial margin. Or even your portfolio might be enough for cover and no money for initial margin is necessary. (not sure about this) So if you have a portfolio of $ 500,000, just have a stop sell order for 7 ES futures contracts 2-3% away from the present price. Sounds good or am I missing something?