I am looking to protect my portfolio of naked put shorts against a sudden drop in pricing of the underlying because of another march 2020 black swan run-off. A target would be for protection if SP500 drops more than 20% in a 2 week time frame, signalling a global non-arbitrary liquidity sell-off. What would be the ideal and cheapest way of buying such protection? buying OTM SP500 or VIX puts seems the most obvious answer but I am not sure if most adequate. Thank you
If you are hedging a portfolio of short vol and long delta, then the best hedge is long vol, short delta (OTM SP500 puts). That will have the least amount of basis to what you are trying to accomplish.
Practically, would that be buying very short dated 20% OTM puts and rolling them? Index options or future options?
I can see that the March 19 puts at 25% discount (2,587) can be be bought for $3.7 I am calculating an "insurance cost" of 0.43% of the back of these figures from now until then - is that what you are referring to?
The maturity is a tricky discussion. Index options or futures options will largely be a personal preference between your platform, tax situation and other positions. Economically they will be the same.
that could work. Buying insurance is as hard as figuring out what trades you want to put on. when you add the hedge, you are changing your strategy from a short vol to a relative value strategy because now your basket of short puts has to outperform the long put.
thanks, this is interesting too: https://seekingalpha.com/article/43...ack-swan-events-strategy-pays-off-in-long-run
By adding the hedge, you are just changing your strategy from a short volume to a relative value strategy.