Using Put Options to Hedge Against Market Crashes
Summary
The document discusses preparing for severe market declines, including financial crises and scenarios involving currency instability. One proposed hedge is to buy long-dated, low-cost puts on individual stocks or, more commonly, exchange-traded funds and indices. It also mentions options on leveraged exchange-traded funds, including puts on leveraged bullish funds or calls on leveraged bearish funds tied to major stock indices.
The central tradeoff is that protection costs option premium, and a recurring hedge may lose value over time and need to be rolled. The answer recommends comparing strategies across crash scenarios with simulation, noting that different contracts can vary in cost and protective effect. It supplies no simulation results or implementation parameters, and the suggestions do not establish that these hedges will protect against every type of market or currency crisis.
Key ideas
- Buying puts on stocks, funds, or indices is presented as one way to hedge against market crashes.
- A hedge requires paying option premiums and may need to be renewed as options decay.
- Different options strategies involve tradeoffs in cost and protection across market scenarios.
- Simulation can help compare hedge costs and performance under different crash scenarios.
- The document also mentions options on leveraged exchange-traded funds without demonstrating their effectiveness.
Tags
Full text
# How to protect oneself from a market crash?
# How to protect oneself from a market crash?
What shall someone do to prepare for a market crash? Either a partial, referring to e.g. a financial crisis like 2007 - 2008 or a full crash, for example after a war or currency reform (being lead by a Hyperinflation)?
Is there any way to protect oneself from such scenario?
As absurd as it sounds, but I've always feared that one day - in the next, let's say, thirty years - such a crash occurs and I sit there with nothing, despite the fact that I've worked my whole life for a currency which doesn't hold any actual value.
## Answer by Tibor (score 1)
https://quant.stackexchange.com/a/74492
If you are considering options then you can buy long puts ("teenies"). You can do this on individual stocks, or more commonly on etfs or indicies.
Hedging comes with a cost though: You need to pay the option premium at a regular interval. Which means buying the hedge, watching it decay and rolling it (i.e. closing and opening a new one).
There are tradeoffs between the option strategy you choose and the costs and benefits in various scenarios. A simulation can be helpful in designing a put protection strategy. Here for ex. you can find a small study which compares multiple options contracts hedging powers and cost at various market crashes: https://gitlab.com/brentp/mesosim-stuff/#lp-powerpy
## Answer by user31928 (score 0)
https://quant.stackexchange.com/a/70746
Further to Frido Rolloos's comment, look into Options on Leveraged ETFs.
In particular, put options on Leveraged Bull ETFs on the major stock indices. Or call options on Leveraged Bear ETFs on them.Shown 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.