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I listened to this on way to office this AM. Great pod. Long time reader of Dr Chan. And I am fairly experienced practitioner of equity tail hedging (since 20th century lol) so I had some comments
1/n https://twitter.com/choffstein/status/1281547842033782784
1/n https://twitter.com/choffstein/status/1281547842033782784
First a little background: I sold equity derivatives for large bank to HNW clients, starting in mid 1990s. So, cashless collars is the main product. Sell call, buy put, sometimes we lend against the floor, cut risk, get $, avoid insider reporting. Winning!
2/n
2/n
But, by late 1990s we are in a crazy bull & VIX is constantly in 20 to 30 range and I am starting to think to myself: Why are we selling all this upside to pay for downside protection we almost never need?
3/n
3/n
Which brings me around to what is discussed in this pod. Dr Chan aims to provide tail hedge while using a linear instrument: ES to provide a convex payoff. How? Combining timing and trend following.
This is super interesting to me. Why?
4/n
This is super interesting to me. Why?
4/n
Because good timing is infinitely easier than keeping a tail hedge program up 100% of the time and having alpha. If you are running < ~$500mm of equity assets (HNW, RIA, FO, etc.) your time would be much better spent learning timing than trying to find permanent tail hedge.
5/n
5/n
Corey asks Dr. Chan "Why ES?", which is a great question IMO. And Dr Chan's answer is so awesome: "because of hedging/derivatives". I love this answer because 1) It is right, and 2) It is a paradox: hedges help cause [more intense] crashes.
6/n
6/n
There are many exploitable algos/patterns in the market but right now the SPX delta hedgers and their siblings, cousins and frontrunners (Hi Dr Chan) are one of the most obvious and juiciest. Of course it won't always be this way, so pick up the Sklanskybucks when you can.
7/n
7/n
Option flows are obviously too big for many underlying products. Maybe not every day, but some days. If you devote yourself to identifying when the good opportunities are there you can get a convex type payoff with a linear instrument.
8/n
8/n
Now, imagine if you can combine the two: good timing + convex implementation....
Anyways, it was a great pod and provides a lot of rabbit trails to go down to try to become a better tail harvester/reaper...
9/9
Anyways, it was a great pod and provides a lot of rabbit trails to go down to try to become a better tail harvester/reaper...
9/9
