The tail risk thread got me thinking. Why are put options used to cover against a tail risk? Why not just selling futures? Futures just seem "cleaner" in that you are not out the option premium, which research seems to have shown buying puts over the long run is a relatively big loser. So why don't people tail-risk hedge by just selling futures? Sorry, rookie question, I know. Thanks!
Buying puts gives you a guaranteed maximum loss. Selling futures to hedge for a black swan event leaves you open to unpredictable losses
People are usually long the underlying. If you are shorting futures for a straight hedge you are essentially moving your overall position towards neutral delta. You may as well buy less/don't buy the underlying. Puts on the other hand has gamma which accelerates its effect on a tail move, "increasing" its power as the move extends. And of course vega which usually favors a tail move. As for the research showing buying puts is loser, well so is shorting the futures, you would be a big loser also. Doesn't mean you shouldn't do them.
First off, I have spent 20,000 hours past several years studying risk, wanted to make my life easier instead of concentrating on making most profits(larger drawdowns), I would concentrate on simple losing much less(lessor drawdowns), if you lose less, one can do size. I have learned much in 8 years about myself and price relationships and even more on charting, changed my "edge" astro-wise, and still studying, using much more physics. Many get values of options wrongly, until day of expiration where underlying price and the option go one to one ITM, time alone slows down value of the option before expiration dates, and if it is 3 weeks out, it will seem you are losing in percentage returns compared to underlying, so you have to factor this into the number of options to the shares or contracts. You have to form your own formula beyond the greeks of options to the underlying or number of shares to options to get more favorable one to one, don't forget to include fees... "Why are put options used to cover against a tail risk?" Cost is far less for overnight and you can go a number of strikes away as opposed to using futures. Unless you have one share each of the S&P500 Index, the ES futures will be not equally be hedging your stocks, it can be where you losing more on the ES than your underlying going up, or losing more on the underlying going down if value greater than the ES. You can add up the value of the underlying as one way to get an idea of how close it is to the futures, but again, what if charts are so different than the ES, you are all but asking for trouble. "research seems to have shown buying puts over the long run is a relatively big loser. " Did you find out the experience and funding power of those buying these puts? When markets rise normally Puts cost less than the calls. I hold trades in almost all 30 dow stocks and 15 others but both long and short, but I use the ES futures to short as I am often selling new contract highs in futures Indexes and use a signal to do so and I buy calls to hedge my futures for profit signal. When I generate a signal that a top comes in on monthlies/weeklies, I sell short futures to hedge stocks=this is called hedging open stock profits. Using futures to hedge stocks, there is math involved so you have equalization between underlying and number of futures. Same goes for stocks and buying puts or calls, even on profitable options, you have to subtract what you losing on time decay, so you making even less than you think you are. In 2007, took few times of finding the "top" and reach my first targets then I got stopped out at breakeven stops. Then took several attempts of finding highs in 2008, each time was buying Calls to hedge my shorts and was out of most stocks in 2007. I was early, but in hindsight.....what a nice ride down. Margins in futures Indexes or any market increase a great deal when something bad happening, but usually one side of the options increase in value but not like margins. Ya, gots to learns them charting mate.