Home Forums Tail Hedge Seeking inputs for portfolio protection

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    Siddharth Shorya

    I’ve been learning about how to protect my investments when the stock market goes down, and I found a video on YouTube on tail hedging – (https://www.youtube.com/watch?v=om6iv2b02sg). This tool seems like it could help me figure out the best way to use the tail hedge strategy to buy put options to insure my portfolio.

    I want to understand this tool better and how to use it wisely, so I’m reaching out for some advice:

    How does the tool help me know how many put options I should buy to protect my investments?
    Can the simulator help me see if the cost of buying options is worth it compared to how much protection they give?
    Can I change the settings, like the percentage drop I’m worried about, to see what works best for my situation?
    How should I read the results the simulator gives me to make smart choices?

    Harshita Gupta

    Hey there,
    As you can observe in the inputs section for the Tail Hedge Simulator, there is an option to adjust the drop percentage by adjusting the crash factors for the report generation. You also get the option to select how far out you want to simulate the crash from today.

    As for your question about how to best read the results –
    The Full Factorial Option Return Calculation report contains a heatmap that shows the return multipliers, max option price and the initial option price for all the expiration dates and strikes. This option can be selected by choosing the 2nd radio button in the 1st input section.

    Once you have read this heatmap and chosen the scenario that provides positive returns – you can pick any of the cells and their corresponding date and strike to be used as inputs for the Portfolio Sizing section that generates a report containing cost and return per put option contract to analyze how much protection is provided for the scenario you have picked.

    The Portfolio Sizing report also calculates the breakeven scenario which provides the number of put options required to be bought for a successful hedge scenario (i.e. the return makes up for the loss).

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