Inferring Universa’s Tail-Risk Put Strategy
Summary
The discussion considers what options a tail-risk fund might have used to profit during the March 2020 equity decline. The proposed structure centers on deeply out-of-the-money puts on the S&P 500 or another portfolio benchmark, with options potentially rolled before expiration. It also suggests selling other options to offset some of the ongoing cost of holding crash protection, possibly including at-the-money options.
These ideas are presented as informed speculation, not as a description confirmed by the fund. The discussion cites a reported fund return and an example of a portfolio combining the fund with broad equity exposure, but gives no trade records, strikes, maturities, sizing, or tested performance analysis. It frames the design challenge as balancing the cost of option decay against the need for large, convex payoffs in a crash. The suggestion that at-the-money options may be rich relative to far out-of-the-money puts is an interpretation of an argument about averaging option prices, not evidence of the fund’s actual pricing model or positions.
Key ideas
- Deeply out-of-the-money puts can provide convex protection against a severe market decline.
- Selling other options may help offset the ongoing cost of holding tail hedges.
- Rolling options before expiration is proposed as part of a possible dynamic hedge.
- A tail-risk overlay must balance option decay against crash payoff and hedge size.
- The suggested Universa structure is conjectural and is not supported by disclosed trade details.
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Full text
# What put options would the Universa Tail Fund have bought?
# What put options would the Universa Tail Fund have bought?
According to this Bloomberg article, Universa was up 3,600% in March 2020, by hedging with extremely out-of-the-money puts: https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-tail-risk-fund-returned-3-600-in-march
Near the end of the article, and according to a chart from the fund, it's described that "a portfolio invested 96.7% in the S&P 500 and 3.3% in Universa’s fund would have been unscathed in March, a month in which the U.S. equity benchmark fell 12.4%."
What put options might they have bought?
## Answer by AMach (score 2)
https://quant.stackexchange.com/a/85248
Extremely likely it isn't a static framework but we can infer the following:
- Buying deep out of the money puts (~~ 30%) on the SPY or whatever asset they are charged with tail hedging
- Also selling options to offset the bleed and pay for some of the theta bill
- Rolling the structure before maturity, they aren't holding the options till expiry
- The hedges on their own are going to lose money over the long run but, when overlayed with the portfolio, outperform the underlying unhedged portfolio (overall CAGR is increased as a result of the hedges being in place)
They must have some kind of secret sauce on balancing these two fundamentals:
- Minimize the theta bleed
- Perform in a crash
Performing in crash means they need highly convex payoffs in the right size (quantity) which really only leaves put options. I personally believe they have a bias/focus on selling at the money options to finance some of the cost in their deep out of the money options. Reason I suspect this is because Taleb in an interview with Wolfram basically got at the following idea:
$\text{Average}(\text{BSM}(vol_1), \text{BSM}(vol_2)) \neq \text{BSM}(\text{Average}(vol_1, vol_2))$
Where BSM is Black Scholes function.
Intuitively this tells me he might believe (probably true) that the ATM options are overpriced and OTM are underpriced under BSM.
Sorry i can't be more help, feel free to link me if any other ideas on how they might be doing thisShown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.