Tail Risk

Discussion in 'Risk Management' started by trading1, Mar 30, 2011.

  1. Do you do anything to manage tail-risk and if so, how? I am looking at the standard deviations concerned and comparing them to the min/max’s over the period to assess any skew and how realistic the assumptions of normal distribution are. But I’d be grateful for any further guidance or comments.
  2. drp7804


    What are we examining here? Strategy P/L per trade over some time period? Volume? Price movement?
  3. Stay out of indices/ETFs and hedge with options on large caps near 100 beta and a flat vol surface. 25d risk-reversals are often flat to favoring calls. If you're overweight diversified oil producers, you could buy a deep otm put on XOM bought with interest on cash or possibly financed by a deep otm call.
  4. Respectfully I disagree re hedging w/ individual stocks vs indices/etfs. Say you hedge w/ a large cap (buy puts) and there is good news for that stock and it goes up 5% while the market along w/ the rest of your portfolio goes down 5% (or more). This can and does happen all the time and not just during black swan events. It is only mitigated b/c large caps aren't as volatile as small caps for the most part.

    I agree you want to pay attention to the IV you're paying. Re the above large cap vs indices/etf debate, for the most part the IV of the former is much higher than the latter while offering no diversification.

    It is a good idea as atticus said to buy the put w/ interest or from selling an otm call but only on an index/etf w/ less risk of an upside move in the UL.
  5. Try hedging by looking at over portfolio beta. Else if still not comfortable, short a few similar stocks in the same sector, but the weaker companies.

    Still not comfortable, like mentioned buy a few puts. If it spike in the opposite direction, reverse the 5 long puts, and short 10 puts instead.