Tail hedging alpha: If you want to structure almost a win, win tail hedging bet. Look for assets that are exhibiting higher relative momentum and place put ratio trades(short ATM, 2x long tails. in the backend of the curve) (1/n).
90 - 120 dte(seems the sweet spot, manage 30 - 60 days In.)
I have also noticed that equities that exhibit higher relative momentum not only breach the Implied move but often have much flatter put skew(thus causing the tails to be relatively cheaper.)(2/n)
If a black swan happens which causes markets to suffer severely, the correlation for slightly positive/noncorrelated assets goes near 1.) which will likely cause your tail hedge to print money(and more money relatively speaking since skew was cheaper.)(3/n)
If nothing happens, you will probably collect half the credit received since momentum stocks statistically continue trending while trending. But let's say you have terrible luck, since you’re managing the trade you will have relatively a tiny loss.
(4/n)
If you have enjoyed this thread and have benefited please retweet it, so others can benefit as well thanks. If I get a lot of retweets I will possibly share more alpha. Thanks, Swan Fam. #finance#stocks#options#trading#Investing#hedging
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Methods to managing negative convexity/tail risk while shorting vol via options.
1) Buy convexity, the most obvious thing to do but most effective. Managing a book full of uncapped negative convexity exposure Is a hassle and negative EV(if you think about the all the possible outcomes occurring.)
Sometimes convexity is cheap in different tenors or even correlated products, but buying convexity in different tenors/products present different type of exposures(don’t look into doing this if you aren’t really advanced/know what you’re doing.)
First and most importantly, your strategy MUST and I mean MUST produce positive expectancy. If you don't have positively expectancy, you will lose money in the long run(law of large numbers.) No amount of discipline will overcome negative expectancy. (2/n)
Expectancy Is essentially your probability-weighted average. To calculate expectancy In a quick and dirty way, you need to calculate your win % * avg win amount subtracted by loss % * avg loss, trading end of day Is a game of numbers. (3/n)