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Alexius Pooh

APAC Business Consulting Intern at SWIFT

02 Mar 2021

Retirement

How would one structure a truly black-swan resistant portfolio?

Some online articles give very vague ideas (e.g. options strategies in terms of puts) but do not delve into specifics. Other articles talk about diversification and smart beta, which shows their lack of knowledge about Black Swans (based on Nassim Nicholas Taleb's book). Are there any sceptics of modern financial theory with knowledge of options pricing able to share some insights?

Discussion (7)

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I agree with Jovan. You need to approach this topic like buying an insurance. The job in this space is to buy cheap convexity and reduce negative carry if you can.
However, Long vol space is one of the most challenging areas in the investment space and i have lot of respect for the people who are using long vol strategies. This space is not for most of the retail investors. Because its not easy to constantly bleed or stay flat for long period. You need to have a very unique mind set to implement these strategies consistently.
Buying a long dated out of the money put option on S&P500 or simple straddle, buy TLT OTM calls or buying VIX calls or call spreads are some of the simple strategies that reatilers like us can implement time to time. You might loose the premium but it will give you some protection when thing are uncertain.. Always need define the portfolio insurance budget(yearly) in advance if you want to implement them.

I recommend to listen to these people if you are interested in the long vol space. They are some of the best long vol investors in the business.

https://www.artemiscm.com/multimedia

https://www.youtube.com/watch?v=z83Rd160YGs

https://www.youtube.com/watch?v=d8Lts5HTZbc

You can checkout this article too- The Dragon Portfolio

https://artemiscm.docsend.com/view/taygkbn

However, the best advice i heard is that when ever you want a hedge in your portfolio, ask your self first, do i want to own the asset in the first place. You can reduce the position size and re-enter later. Sometimes staying in Cash is also taking a postition. When market goes down by 50%, your portfolio is down by 10% or 15% because of cash. That is a big win.​​​

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I will share an example of options since I trade it but just want to emphasise....

Hedging is a huge topic but just know that it is not possible to make money every single day, week, month and year, sometimes we go through drawdowns and that is ok. The purpose of hedging is to soften the blow and go down less than if you are not hedge. But a hedge also has an opportunity cost; possibly lower returns than if you didn't hedge should your positions go up.

Preference

Some prefer to be vastly diversify, others prefer to have both short and long positions concurrently, and some like Peter Lynch or Buffett would argue they don't even care about temporary drawdowns, but just take advantage of discoutned prices.

Options Example

An example of having short and long positions concurrently, I trade options... My "insurance" for an unforeseen event is to have long call combos on the VIX (fear index) I use diffferent strategies, one of which is called a back ratio. It essentially allows me to "pay" say like $60 per contract for a 2-3 months protection should a major market crash happen. This allows me to "short" the market and I have limited losses no matter how high the market goes.

If we have a correction like pre-election in sept last year and VIX spikes to about 40, I can make around over $500-600 per contract +/- time decay and factors affecting an option price. That's about 10:1 payout.

If we have a bear market crash like feb/march last year, my combo can be sold for 1.5-2.5k per contract. That's 25:1 reward:risk ratio

If the market does not crash and it's time for me to renwe the "insurance", I just pay another round of premiums and I'm protected for the next X months.

However, this, has a very very low probability win rate and I expect it to lose 90% of the time. And i'm happy for it to lose because this is an insurance. Just because I buy insurance for cancer, I wouldn't pray to get cancer right? I would definitely still benefit more from the market moving up (or sideways if I'm trading a range)

That being said, if you are not experienced in options please do not dabble in it, there is a lot to it to learn. Every strategy has it's pros and cons. Back ratio has something called a death valley to avoid and you will only be able to avoid it if you understand how it works, but ofc once you do you can see how it's such a powerful way to hedge just like purchasing insurance.

*Not a financial advisor, just a random retard​​​

Randy

02 Mar 2021

Financial Analyst at

I am not sure I am aligned here. Would be glad if you could share (at the extreme, it is okay) the b...

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