Designing a Tail-Risk Put Sleeve for a Barbell Portfolio

# Questions regarding a “lite/kindergarten” Barbell investement strategy implementation


# Questions regarding a “lite/kindergarten” Barbell investement strategy implementation












The idea for this question is more or less taken from a slight hint regarding how Universa Investments L.P. functions from Taleb's Antifragile (obviously the real case is far more complex but this is just a home implementation).

Suppose you have a portfolio X, where 20% of X gets diverted into put options, more specifically in a 1/N distribution (hinted at in some page in Antifragile). Let's assume that N = 5, then we divert the capital (4%) into 5 put options.

What is a good way to determine if it's better to buy the options closer to expiry (and subsequently renew the purchase in set-intervals, and how to determine the intervals) or farther away from expiry and how far out of the money should they be? I know that if I buy them with a bigger TTE (time to expiry), the Vega Greek will be more pronounced and thus the payoff from a change in volitility (on which this set-up is banking on) should be better.

Any other tips how to compute, at least in principle, how out of the money the options should be to maximize potential gains (I know this isn't exact science, I would just like to have some dialogue on this topic)?

Tyvm for the answers.

## Answer by nbbo2 (score 1, accepted)

https://quant.stackexchange.com/a/65485

The design of such a strategy is a complex thing. It involves a trial and error process of looking at historical data on option prices, as well as an understanding of measures such as Vega. All the while knowing that the future will not be exactly like the past.

If you look at existing funds that follow such a barbell strategy perhaps it will give you a starting point for iterating your own implementation.

Here is the composition of Cambria Tail Risk ETF, a fund designed by Meb Faber who I consider a very good quant and who has published widely (unlike some others who are tighter with information).

Cambria Tail Risk ETF (scroll to bottom of page)

As you can see they have Puts expiring in 3 mo, 6 mo, 9 mo and 12 months with the size of the position increasing with maturity (0.275 million, 1.2 mm, 3.8 mm, 7mm). With the S&P at 4220, the strikes they own are 3900 and 3700, approximately 8% and 12% OTM as of now.

This ETF is a publicly traded vehicle so there is good data on performance. (Of course the ETF is not intended as a standalone holding, it would be held together with a base portfolio and the combined performance is what is relevant).