Tail hedging for degenerates.
For most of my time, I just thought of tail hedging as the "cost of entry".
A "ticket to the dance" if you like.
You can't predict what happens in the tails - so pay up to cover them & go play hard in the peak of the bell curve, where your tools and models are most valid.
If you're a good trader, you'll tend to find that your highest expected return opportunities appear after massive moves.
Disconnections happen when others risk models are flashing red and they are FORCED to trade (rather than want to).
You want dry powder for these times.
You can't predict the tails, so just get them covered and concentrate on the games you can win at.
"Getting it covered" = buying OTM options.
Other approaches such as short trend-following will *probably* pay off when you need it, but might fail.
That isn't good enough here
One of many trade-offs for the trader.
- best opportunities are in chaos
- chaos doesn't happen very often
- in benign times, easiest way to make money is carry-like stuff that incinerates your buying power just when you want it most
Tail hedging doesnt solve this, but helps
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