Home Forums Tail Hedge How does one use the Tail Hedge Simulator?

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    1) Start by selecting the first form. “Simulation: OTM PUT Options Expected Return”

    -Select a ticker symbol that you want to hedge. Be sure put options exist for this asset.
    -The tool then queries all the put option metadata in real time for that ticker. All the OTM (out of the money) PUT option expiration and strike prices data will be returned and will populate the form’s further pull down menus.
    -Keep all the defaults and select “Single Contract Option Calculation”
    -Select the put option expiration date and strike price. This is to be used in the simulation as the key(100%) hedge vehicle.
    -Click button “Simulate”

    2) Review the report, its written in a data science literate programming style(notebook method).

    -This method self-documents and explains the steps of the monte-carlo Black-Scholes forward walk simulation pipeline.
    -The objective of this specific report scenario is to estimate the potential price of the option in the post crash period. Section 8.2 in the HTML report is the plot summary. Section 9.1 contains the table summary.
    -Mean and Median results of the simulation trajectories are used for the expectation.


    3) After understanding of the analysis in step 2 above. Proceed to the form’s scenario option of “Full Factorial Option Return Calculation”.

    -This runs as the title states, all combinations of strike X expiration dates. This is equivalent to running the scenario: Single contract from above, however ALL combinations are run.
    -Takes a few minutes to complete. Thousands of combinations are usually computed, the form text in blue color has the actual number.
    -What’s key in this HTML output is Section 9 Heatmaps, specifically 9.3 “Returns”.
    -Inspect this return map visualization, your looking for hot spots, areas of the space that have high returns. These are good potentials for hedge vehicles.


    -Blade P.

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