Buy S&P 500 put spreads for cheap insurance
The speaker argued that buying 2-to-3-month 95/80 put spreads on the S&P 500 is a highly sensible, cost-effective way to hedge against building macro and political risks.
The argument
The speaker noted that the cost of this put spread is around 1% of the portfolio. He argued that while realized volatility has collapsed to extremely low levels, the underlying economic, geopolitical, and US political risks are actually rising, making forward-looking insurance cheap relative to those risks.
The thesis, stress-tested
✓ What validates it
- ✓A spike in the VIX or a sharp correction in the S&P 500 that validates the protective overlay
- ✓An increase in 3-month realized volatility above current single-digit levels
▸ Risks discussed
- ▸The premium spent on the options will decay if the market remains in a low-volatility regime
- ▸Underperforming a benchmark during a continued market rally
Hear it yourself
"In addition to the simple three month $95.80 put spread on the S and P, one of my favorite hedges is in the HYG. These options are impossibly low in price because the realized vol has been impossibly lower."
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