He spoke at a local society event here a year or so back and that’s pretty much the gig he was selling. The majority of your portfolio in short treasuries and use the yield + some capital to purchase puts/calls (he’s not all negative). He also advocated VC and some industries (can’t really remember) with asymetrical payoffs. Interestingly, the portfolio he advocates does have very little downside risk. I know he had some charts comparing it to a variety of allocations in terms of expected return and risk. I wish I had a copy of the presentation, some interesting slides. Though I’m certainly not in full agreement with him.
If you buy a lot of puts, you don’t risk much of your capital. The problem is you keep paying for puts…
. . . most of which expire out-of-the-money.
Right, but the argument that large negative moves are non-Gaussian and are poorly priced could be valid precisely because they happen so infrequently.
Agree with your post but wanted to touch on this. How do you know when to exit this trade? What filters, signal, logic do you use to get out and what implicit market assumptions do those decisions have? I, like everyone else, have my magic 8 ball reasons to stop selling vol, but would say that empirically employing a ‘stop-loss’ type strategy on short vol isn’t usually a great decision (as is the case on delta1 strategies).
S2KMag - True, could always buy itm puts, they’re generally ‘cheaper’ in index, though they cost more.
BWYF - Agreed, the argument that the left tail hasn’t showed up yet is always valid and tough to argue against. That’s kind of just life though, and positioning for those events only is a tough way to go imo.
m2c
If we could perfectly predict volatility spikes, I guess it would not be a “problem”. I interviewed at some place this year and the guy asked me this same question. I said that if I knew, I probably would not be interviewing at their company. I don’t think that was a very good answer, as they did not call me back after that.
Regarding ITM puts… the “time value” is less, since the puts have less gamma and vega. Is this what you mean by “cheaper”? Keep in mind though, that you generally pay a higher vol price for ITM puts, since vol skew is negative (low strike implied vol is usually higher than high strike implied vol).
I appreciate all the responses. I’ll have to reconsider my idealogy of option investing and even what i want to use these funds for.