Tail hedging longterm passive portfolio

Looking into (simple) ways to get some tail hedge (insurance) on quarterly rebalanced ETF portfolio.

Background : I had some puts and put spreads at the beginning of last year that really saved my sleep in march and now I would like to implement a systematic way to buy tail protection in the long term.

Idea:
Simple: set 1% of portfolio aside at beginning of every year. Buy 5delta put spreads for every quarter of the year with the highest weight in the longest options (Q4) so for example 0.4% in Q4, 0.25% in Q3, 0.2%in Q2 and 0.15% in Q1 then repeat next year.
Slightly more complicated: Roll the expiring Q put spreads into the next year. so at end of Q1 2022 buy the Q1 2023 and rebalance the other spreads to get back to target weights.

The current DEC22 SPX 2800/2700 spreads cost ~6$ for 94$ protection in the event of a ~40% crash.
The overall hedge portfolio (weighted Qs) would pay ~ 4$ for 96$ (still seems pretty expensive)

The other alternative could be 1:2 or 1:3 put backspreads but I don't like the risk these would add to the portfolio.

 

in a 40perxent crash the spread won’t be worth 96. It will be worth like 40 or even less.

 

Sorry meant to say 50%, ie covid crash level

 

same with a 50percent crash.

the short leg will have so much time value and with sell offs that big, volatility moves become so big that the third order vol effects actually matter.

 

do you have a better strategy? Maybe short VIX futures and buy a bunch of calls?

 

what about doing some diagonal spread, for example short 2x Q1 10 delta put and long 5 delta Q2,Q3,Q4 1x each for a 2:3 ratio. then let the Q1 expire, roll Q2 into Q1 2023, short Q2 10delta and repeat. Maybe do this with spy and be prepared to take assignment on some of the short puts to DCA?

 

The best method of controlling your risk is having a strategy that takes you out of the market when it trends down.

 

What about false positives

 

What about them?
From time to time you get whipsawed. You keep your capital intact and miss the big down moves

 

have done analysis in this field.. problem is, indices can also go down without a spike in vix, eg the year 2000 ( 2008 and 2020 had a much higher spike, so why would the next big ‘ dip’ have an ‘ insured ‘ spike in vix?)
So simply banking on a continuously declining vxx and buying calls or call spreads from proceeds cant give you what you are looking for; assured AND cheap hedge.
At least in this way