I will never understand why this isn’t Investing 101...https://twitter.com/bennpeifert/status/1362908508237090816 …
What are your thoughts on *why* tail hedging works? Finance 101 says OTM put vols shd be bid up until impact of tail hedge on your portfolio was ~0; if not then short OTM puts have a negative risk premium — seems counterintuitive!
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Big part of value comes off providing liquidity when most needed - not having continuous access to abundant cash is unthinkable to most thought leaders
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Why it *has* worked. Include the GFC in your back test to help sell it as a strategy. Everything is function of price.
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It true. I guess what I want to know is what’s the story for why it will continue to work in the future (ie why are puts still priced low enough that they will help rather than hurt the geometric return). Is it outlier blindness (behavioral) or is there a structural reason?
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Structural reason=non-economic hedgers, supply/demand imbalances. There isn’t a fixed VRP, it frequently does go negative and usually in a Minsky sense years before a crash. Reduce vol tax is a time horizon arbitrage. Even Scholes admitted to “omega”=premia for risk transfer serv
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Monetization also a key factor when hedging a linear instrument with a convex one, vol can overshoot. I’m not sure there is a “correct” price for options, they are either overpriced or underpriced, can only know in hindsight, based on no move or sigma of phase shift
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