Topic · Systematic Strategies & Alpha
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30 articles · 4 checkpoints · 19 deeper reads · 7 reference notes
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A tail hedge pays off in a crash and loses money almost every other year, so the real design question is never whether it will pay off, it's how much steady bleed a portfolio can tolerate for insurance it hopes never to use.
On February 5, 2018, a fund that let retail investors bet against volatility lost effectively all its value in a single session, and the mechanism that killed it, a forced rebalance that had to buy into the exact spike it was hedging against, spread the damage across the whole VIX futures market.
Selling options or volatility-linked instruments harvests a real, persistent premium, implied volatility tends to run above the volatility that actually shows up. It also means collecting small, steady profits most of the time in exchange for occasional losses large enough to erase years of gains at once.
Options priced ahead of an earnings report tell you exactly how big a move the market expects overnight. Compare that number against what the stock actually does, again and again, and you can find a systematic bias, but the classic trade of selling the straddle assumes the bias holds, and it doesn't always.
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