Right Tail Hedging: Managing Risk When Markets Melt Up

Posted: 15 Feb 2018

Date Written: February 3, 2018

Abstract

Popular academic and practitioner lore claims that buying options, whether puts or calls, is a negative expected return investment and hence should not be undertaken by “rational, risk-neutral” investors. However, real world considerations such as the possibility of large jumps and imitative behavior of traders in both bull and bear markets can reverse this conclusion. In particular, the potential for positive economic shocks such as those observed since the 2016 US election may make call options based strategies superior to buy and hold strategies. In this article, the author extends work published in 2007 in the journal on left tail or downside tail risk hedging to “upside” hedging, whose importance has become increasingly relevant in an environment of low yields, elevated asset prices, low credit spreads, indexation and multi-decadal lows in call option prices.

Keywords: Call Options, Upside Risk, Tail Hedging

JEL Classification: G11

Suggested Citation

Bhansali, Vineer, Right Tail Hedging: Managing Risk When Markets Melt Up (February 3, 2018). Available at SSRN: https://ssrn.com/abstract=3117664

Vineer Bhansali (Contact Author)

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

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