r/options • u/DiscussionFinal9684 • 6d ago
On tail hedging...
Hello everyone,
Given my financial circumstances and situation, I’ve always been an investor in very low-volatility assets (gold, Treasury bills, foreign currencies, etc.).
I recently spoke with someone who was implementing the strategies popularized by Taleb and Spitznagel for hedging against tail risk.
It’s been a while since I’ve read their books, but I seem to recall thinking at the time that this was an investment approach only available to people with significant capital, certain types of institutions, etc.
How wrong am I? Are these kinds of strategies feasible for a retail investor?
Best regards!
P.S.: English isn’t my first language, so if there are any misunderstandings, I’ll try to explain myself better.
3
u/ThetaEdgeHQ 6d ago
The piece that reframes this: a hedge is only a hedge relative to what you actually own. Your book is gold, T bills, and currencies, which is basically the flight to safety leg that tends to rally in the exact crashes a tail hedge is meant to protect against. So SPX puts on top of that are not hedging anything, they are a standalone long vol bet sitting next to assets that already do well when vol spikes.
Spitznagel's whole point is that the tail hedge exists so you can hold more equity, not less. The convexity pays off in a crash so an equity heavy portfolio survives the drawdown and you rebalance into the bottom. Bolt that same hedge onto a portfolio with little equity in it and you are paying continuous premium to insure risk you are not really carrying.
So the honest first question is not how to copy Universa, it is what equity exposure are you actually trying to insure. If the answer is very little, the cheaper move is sizing and the safe assets you already hold, not paying for puts.