How To Hedge A Slow Equity Sell-Off

This report outlines an adaptive, systematic hedging strategy using short-dated, fixed-payout put spreads to mitigate risk during slow, persistent equity drawdowns. The approach addresses path dependency and allows for counter-cyclical performance through a dynamic budgeting framework.

Key Takeaways

• 1.Short-dated ATM fixed payout ratio put spreads provide predictable downside cover because the spread width adapts to market volatility.
• 2.Using short-dated options reduces the path dependence associated with long-dated options, which is crucial after strong rallies.
• 3.Budgeting strategies introduce counter-cyclicality, buying more protection in benign markets and less during sell-offs, improving performance.

Table of Contents

• Short-dated put spreads with fixed maximum payout ratio to hedge a slow sell-off
• Key takeaways
• Fixed max. payout ratio put spreads and market pricing
• Higher skew leads to lower put spread widths
• Strategy reactivity
• Benefitting from budgeting
• Budgeting for other indices: EURO STOXX 50 and Nikkei 225

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