In 2000 it took two plus years to go from top to bottom and in 2008, it took 18 months to go from the top to the bottom (both down 50+ pct). You don't have to determine the magnitude of the drop or guess when it will end. You recognize market deterioration, you take your short position and you manage it. Downturns such as 1987, the 2000 Dotcom Bust, and the 2008 subprime melt down did not happen overnight. For those who aren't oblivious, in such events, at some point it becomes obvious that metrics are deteriorating - economic indicators turn down, earnings announcement disappointments increase, analyst downgrades and earnings revisions increase, the VIX increases, all beginning long before the crisis becomes acute. Transitioning to cash or quality debt is something that any experienced investor can achieve. If god forbid one takes off the 'long only' tunnel vision blinders, one can even go short a small position and transition to more short as the market drops further. For investors, let the portfolio’s declining value dictate the transition from long to short (and vice versa). Trying to guess when a bear will start or end is a fool's errand. React, don’t predict. If IV is high and you want to play a drop, sell bullish call spreads.
Simulated VIX from OEX midpoints at the 87 break calculated out to about 150 volatility. Lot's of noise in that number and markets weren't really continuous - so the number has a lot of noise, but it was ugly.
Would you be so kind as to give a man an example? Would this be like buying puts and selling Bear Call spreads to lower cost basis (or perhaps Bear Put spreads)? Perhaps there's a link that describes the philosophy? Thanks!
Another good point. Realized volatility picks up during any down turn. If one is using leverage, they should reduce leverage. Risk parity and CTA's also target volatility, traders should also imo. If they are using leverage of 2 when realized vol is at 10, then leverage should be reduced to 1 the realized vol is 20. Examples of realized vol picking up long before recession.
Sorry, my bad. The long/short correlation portfolio was with financial stocks (not options) which were being hammered during the GFC melt down. My option comments applied to defending a collapsing combo such as a bull put spread.
+1 on that one. Bear markets are much shorter than bull markets. The first investment book I ever read was Peter Lynch's one up on Wallstreet of 1989. He makes the same point there only excluding the early 1970ies bearmarket which was longer. Having lived through everything since 1985 I can pretty much confirm that from a personal experience perspective. When you adapt option strategies to the bear market its fortunate 'markets do not fall up' but beware the bear period is always shorter than the media make it appear.