Accord According to the Professor Taleb the 6+ standard deviation puts are priced too low. But who wants bleed money being long them for 10+ years before you realize your 10,000 to 1 winner?
You would think if you're going to sell every option on the board year-in and year-out, you would at least be long thousands of "teenie" puts to hedge against a crash. Maybe they did have some downside protection along with their short deltas, but obviously it wasn't enough. They are probably back selling option premium, knowing that they don't have to worry about blowing up for another 10+ years.
Near the bottom on a 10-year chart? It's not an absolute number but a significant divergence between implieds and stat what you want. The market feels dead and all the pundits on TV are telling you to hedge because of how cheap the vix is. That's when you should be selling vol. I'd say 2-3SD is a good place to put your stops but obv that's very model dependent.
For run-of-the-mill stocks and equity indexes with lognormal prices use ln(K/S)/σ√t = 6 and solve for K (strike) to get your desired put option.
Thank you. I appreciate your comments. There seemed to be another approach: https://www.elitetrader.com/et/thre...ons-portfolio-insurance-at-a-discount.346405/ I appreciate it if you can also comment on the above thread.
Have a look at the attached file for example calculations. Of course they are wrong because it assumes a normal distribution and no skew or kurtosis, but you get the basics.