Tail moves. Vomma and gamma will surprise you. In addition you are getting paid for it addressing the long term positive expectancy part of your inquiry.
As short vol traders, we are always risking getting wiped out. A hedge with zero or positive alpha is more helpful to us than than it would be to protect, say, a 60/40 portfolio. (Should that be called "crisis beta?") Trend-following is one way to get that exposure; another is to buy options with very slow time decay relative to the protection they could provided in a crisis situation; a third is to get them so cheap that the delta-neutral position has a positive expectancy.
If you held SPX Feb'18 1450/1400p from 26th Jan through 9th Feb 2018. You made $1000 on 50x100 contracts and that's before slippage and commissions. What's the upper limit on the sizes that you can trade in such strikes in ES/SPX?
Look at the expiries and strikes again I entered for Feb. A Feb 14xx for a Feb move would've yielded you very little I agree. In fact I am surprised it was even positive. Goes to show we typically understate the exponential nature of the greeks on tails.
Depends on what you'd want to give up: 1. Time (settling for initial risk that decreases or turns into hedge over time): use Ratio Spreads or Unbalanced Butterflies, buying them at credit. 2. Margin/leverage: same as above, but using small portion of capital to cover margin requirements during black swans. Or sell put spreads, while those too will require free capital to cover margin during black swan (you can get better margin initially while they are far OTM). 3. Your time: manage all of the above, consider mixing these with back ratio spreads, VIX calls, and/or occasionally buying back some of the sold put legs to end up with plain spreads or puts. 4. Income. If you're OK with making less than fed intererest rate, say 1.5%, while potentially doubling or tripling it during black swans: use skewed conversion. 5. Nothing: Do nothing or use any conservative income strategy, while keeping some cash on hand to start selling overpriced SPX puts during/after black swan. (market making) Or just be more creative than everyone else.
As once mentioned by yourself, "everyone wants to be long convexity", I am amazed you figured out a way to extract alpha being long gamma. I assume that is why you are paid the big bucks. Ps. Would you mind sharing what you were long/short in 2008 (without giving alpha away). I have heard you made a lump sum during that period.
One simple solution which is not been mentioned is long US treasuries. It is long tail (equity) risk and +ve long term expectancy (nominal anyway). If you drop long term expectancy to zero, then Gold
Ha, didn't I just say "Or just be more creative than everyone else.". Good to know that at least this is possible
Thanks for taking the time Guru! You've certainly given me some food for thought. What's "skewed conversion" -re-investing some risk-free/treasury income in paying premium? I've looked at #1 in the past but the margin usage (for ratio spreads on back-burner) away from long theta strategies meant that compensation from hedges during draw-downs is not enough to make up for the loss in income (due to scaling back on long theta strategies) i.e. #1 looks inferior to #5 - at least in my experience. Or am I blindsided somehow?