Hi, Quick question: imagine you would want to hedge a portfolio, with lots of well-diversified positions consisting of stocks and derivatives, against a "black swan" type of event. The portfolio currently generates some positive returns if the underlying stocks (market in general) goes down 10-20%, but from 25-30% downwards it pretty much turns ugly quite fast. How do you protect yourself against that? Obviously, by just buying puts on, say, SPY, you'd likely over-pay for insurance as you don't need insurance (on the contrary) for the first 20% down, which is what you're in fact getting. Are there any other option strategies or financial instruments that would do a better job? Thanks for reading.
yeah i understand hedges cost something. i was just hoping for something a bit more specific; a hedging strategy that starts paying off at a certain drop-point, and not just generally directional.
I wish I could, but I'm not allowed to give trading advice and for the advice to make sense, I'd need to see a sample of your current portfolio. Anyone here that offers any advice without seeing details will not be able to provide what you need.
You can do some ratio put spreads or some such malarkey, but all these things will always be somewhat tricky.
You can go back to the old idea of portfolio insurance and trade in a way that buys you a synthetic put option on your specific performance. Very simple at some degear point (say a 30% drawdown) you reduce your portfolio exposure by 10%; then continue until at say a 60% drawdown you have no exposure. You keep tracking what your portfolio would have made without degearing; when it recovers past the triggrer point you regear. The benefit of this is it zero premium and you're not paying any premium until you hit the first d/d point, and you aren't paying the smile on OTM puts, or the implied vs realised vol premium. The downside is like all insurance it will cost you money; unless the portfolio behaves in a certain way you'll end up making less money in the long run (see here). Also trading costs. The more aggressive the ratchet, the higher these will be. If you're a big institution you can do a total return swap with them to pay the premiums over time. In the long run it's easier to just keep half your money in cash and then the rest in the risk stuff you're prepared to lose (the Taleb barbell strategy). GAT
You may want to look into VX futures to use when you cross that line. http://www.cboe.com/ms/vix-futures-specsheet.pdf
Put in a stop market order to open at S&P -25% to short ES futures for the nominal amount of your overal portfolio