I'm looking for some resources on how to hedge a stock trading system against very rare adverse market events. I.e. I'm willing to suffer regular drawdowns in 99% of market conditions. However, in case of say an '87 crash, I want to limit my losses to X%. I know an investor holding a portfolio, would estimate beta and with an R-squared that is high enough, he would buy index put options with a strike set at the max. loss he's willing to suffer. But a typical trading system has (should have) low R-squared in normal market conditions, so using this approach seems inappropriate. Because these events are so rare, it also doesn't make sense to optimize the system using data from '87, as a next crash will likely happen under different circumstances. Another approach would be to hedge all individual trades with options, but this is expensive in terms of slippage and transaction cost and only possible if options are available. The safest way seems to be to take beta for each of the individual stocks the system traded, take the average of 5% highest betas and use this to determine the correct index put options to buy. This might be very expensive though because the betas supposedly will be high. Any thoughts on this?