There are also some alternatives to directly buying index options worth considering.
The SWAN and ISWN ETFs are insured, but still have ~70% exposure to the upside. They do this by holding 90% bonds and using the other 10% to buy LEAPS calls with a Delta of 70, which are synthetically equivalent to a married put position (with puts at a Delta of −30). If you replace some of your portfolio with these, it would probably handle the next bear market better.
If you want more than the 70% upside, you can replace more of your shares with the LEAPS yourself. Be careful not to over-leverage with LEAPS. The idea is to replace portfolio exposure with something cheaper, so not as much money is exposed (but with similar upside), not to increase exposure when you’re expecting a bear market.
Shorting an ETF that sells puts (like PUTW) is like buying puts. (There are also several ETFs that write covered calls, like XYLD, which are synthetically equivalent to selling puts.) Beware of dividends and borrowing fees. Insurance is not free.
For the tail risk, consider the VXTH index’s strategy of buying VIX calls. I don’t think there’s an ETF for this index currently. You’d have to implement the strategy yourself.
And finally, hedging with something uncorrelated to the stock market is good for a long-term portfolio anyway. When you rebalance to your target allocations after a crash, you usually end up buying stocks low and selling the hedge medium to high. 7-20+ year Treasury bonds are a decent investment in their own right, but have actually been anti-correlated with the stock market due to the flight-to-safety effect. Gold, TIPS, and utilities also make good hedges. (Real estate has also been used, but this is a questionable choice, especially if you already own a house.) Diversification is probably wise.
VIXY does have the advantage of being more granular than the VIX calls. But it also has a strong negative drift. If you hold very much of this, you will lose money quickly. Just look at the chart. Insurance is not free. I actually hold a small amount of the inverse fund, SVXY, most of the time due to its strong positive drift. (Small because of its strong negative skew). I’d say hold no more than 1-3% VIXY in a portfolio for tail insurance. The VXTH weighting schedule is also applicable to VIXY. VIXY probably isn’t going to pay you much if the VIX is too high or too low.
NTSX has good tax efficiency, but it holds 90% stocks outright and 10% in 6x leveraged bond ladder, kind of the opposite of SWAN. That means you’re still exposed to the tail in a bear market. SWAN is better insurance. You literally can’t lose more than 10% on the LEAPS in a short period. The bond component is a separate question, but it tends to have good anticorrelation.
NTSX or leveraged ETF balancing strategy or even SWAN to some extent—All of these are prone to losses when the interest rates rise and more prone to losses when interest rates are raising rapidly . In such scenarios bonds and equity loose together and historic negative correlations might temporarily align positively. DRSK is one interesting ETF which can be thrown into the mix similar to SWAN ,Their fixed income portion is not duration heavy compared to other tail risk strategies like SWAN and their options are actively managed
However the biggest holy grail of risk management is to find an allocation/asset which can loose very little in normal times and gain maximum during crisis irrespective of the nature of crisis. Short duration bonds can satisfy the first condition, that is loose small on normal times but they don’t gain the maximum in crisis. Long duration leveraged bonds can help with gains to certain extent but will loose when the interest rates are rapidly rising
The ones who have found the holy grail can actually leverage and make a ton of money in the market with peace. I can guess Volatility is definitely a component in this holy grail strategy , but what we are missing is how to time it.
I’m not certain, but I’ve heard this has been possible with Interactive Brokers at reasonable rates. https://interactivebrokers.com.au
There are also some alternatives to directly buying index options worth considering.
The SWAN and ISWN ETFs are insured, but still have ~70% exposure to the upside. They do this by holding 90% bonds and using the other 10% to buy LEAPS calls with a Delta of 70, which are synthetically equivalent to a married put position (with puts at a Delta of −30). If you replace some of your portfolio with these, it would probably handle the next bear market better.
If you want more than the 70% upside, you can replace more of your shares with the LEAPS yourself. Be careful not to over-leverage with LEAPS. The idea is to replace portfolio exposure with something cheaper, so not as much money is exposed (but with similar upside), not to increase exposure when you’re expecting a bear market.
Shorting an ETF that sells puts (like PUTW) is like buying puts. (There are also several ETFs that write covered calls, like XYLD, which are synthetically equivalent to selling puts.) Beware of dividends and borrowing fees. Insurance is not free.
For the tail risk, consider the VXTH index’s strategy of buying VIX calls. I don’t think there’s an ETF for this index currently. You’d have to implement the strategy yourself.
And finally, hedging with something uncorrelated to the stock market is good for a long-term portfolio anyway. When you rebalance to your target allocations after a crash, you usually end up buying stocks low and selling the hedge medium to high. 7-20+ year Treasury bonds are a decent investment in their own right, but have actually been anti-correlated with the stock market due to the flight-to-safety effect. Gold, TIPS, and utilities also make good hedges. (Real estate has also been used, but this is a questionable choice, especially if you already own a house.) Diversification is probably wise.
There’s also NTSX (90/60 exposure).
For the VIX, there’s VIXY.
VIXY does have the advantage of being more granular than the VIX calls. But it also has a strong negative drift. If you hold very much of this, you will lose money quickly. Just look at the chart. Insurance is not free. I actually hold a small amount of the inverse fund, SVXY, most of the time due to its strong positive drift. (Small because of its strong negative skew). I’d say hold no more than 1-3% VIXY in a portfolio for tail insurance. The VXTH weighting schedule is also applicable to VIXY. VIXY probably isn’t going to pay you much if the VIX is too high or too low.
NTSX has good tax efficiency, but it holds 90% stocks outright and 10% in 6x leveraged bond ladder, kind of the opposite of SWAN. That means you’re still exposed to the tail in a bear market. SWAN is better insurance. You literally can’t lose more than 10% on the LEAPS in a short period. The bond component is a separate question, but it tends to have good anticorrelation.
NTSX or leveraged ETF balancing strategy or even SWAN to some extent—All of these are prone to losses when the interest rates rise and more prone to losses when interest rates are raising rapidly . In such scenarios bonds and equity loose together and historic negative correlations might temporarily align positively. DRSK is one interesting ETF which can be thrown into the mix similar to SWAN ,Their fixed income portion is not duration heavy compared to other tail risk strategies like SWAN and their options are actively managed
However the biggest holy grail of risk management is to find an allocation/asset which can loose very little in normal times and gain maximum during crisis irrespective of the nature of crisis. Short duration bonds can satisfy the first condition, that is loose small on normal times but they don’t gain the maximum in crisis. Long duration leveraged bonds can help with gains to certain extent but will loose when the interest rates are rapidly rising
The ones who have found the holy grail can actually leverage and make a ton of money in the market with peace. I can guess Volatility is definitely a component in this holy grail strategy , but what we are missing is how to time it.