CAOS
EA Series Trust - Alpha Architect Tail Risk ETF
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Yeah, largely agree but wanted to test it. Bit of push-back: beta is an average relationship, while CAOS is intended to cover a specific event. Your suggested alternative is good though, I like it.
I don't see the point of using option based tail hedge if your portfolio beta is <1 because the long puts never adds to your return, unlike Managed Futures or Bonds that have positive expected return. In fact I don't think you ever need it unless your risk level is so situationally unaware like few bad months away from liquidation. Some combination of managed futures, long term treasury and gold, like 20% MF 10% EDV 10% GLD would be what I consider a decent all weather ballast. CAOS is also unfortunate as its backtests showed it bleed in 2022, I don't know if there are better designed long vol funds that have positive long term return by themselves.
Cash is trash. If you want something that can run when the market is down or simply holds up better when things are tanking, here’s what I found that requires further research. (Don’t let their poor performance in a raging bull market fool you. Sometimes that’s a feature.) DBMF, CTA, KMLM these are managed futures that can go short or long as needed to offset a crisis. CAOS is an ETF that serves as a crash risk with S&P 500 protective puts strategy designed for sharp market sell offs. BTAL is long low-beta stocks and short high-beta stocks. It benefits when the high beta stocks crash. TAIL holds treasuries plus out of the money S&P 500 puts. PIT is diversified commodities like energy, metals, livestock, agriculture. USMV is equities but it’s the minimum volatility. It will go down when everything else does but much less. I group them like this: True crash protection: CAOS, TAIL, BTAL Diversifiers: PIT, DBMF, CTA, KMLM Lower risk equity: USMV I also keep cash in preferred stocks like STRC and SATA. They pay out fantastic distributions but they’re subject to the fluctuations of both the market and BTC.
Current ATM long put for 5/22 is ~11k. That covers 690k in downside/notional value. So to hedge a full 2M portfolio it would have been 3-4 depending on if you want nearly full coverage, or more coverage than needed. So 2-3% of your account value. You could use optionstrat or something similar to see how the price would change based on vol expansion, theta decay, etc. I think it’s hard to time these things perfectly. In general people don’t bottom tick it. Alpha Architect makes CAOS which uses box spreads, short put spreads and deep OTM calls. It roughly keeps up with risk free rate but has asymmetric payoff in flash crashes. Not necessarily in slower grinds tho
Interesting approach. Did you say that this isn't a foolproof approach cause offensive sleeve is long only? Curious to know aspect of my post made go like...."hmm this ain't foolproof" I can appreciate those who short and pull it off but at this stage it just isn't a part of my arsenal. I would include an etf such as CAOS (TAIL if I knew a tactical signal which I don't) under my diversifer sleeve but that's it. I appreciate your insight and it seems like you've stuck to something that works but I can't put my finger on it. Likely cause I don't wanna introduce shorts at least for now & would focus only only long + AA (+/- 15% shift)
So, 70% large cap, mostly growth stocks, 20% crypto, 10% gold (after its gone parabolic)? It seems like a very risk on portfolio. I think you'll dump it when the next bear market hits. Most of these tickers are highly correlated -- rebalancing won't save you. It's easy to say you have a high risk tolerance in the good times, but when you're down 70%, you'll have regrets. 45 years is a looong time. If you're serious about high risk assets, you need some sort of hedge in there. Buy puts each year to CYA or consider allocating 10-30% to stuff like KMLM, DBMF, BTAL, CAOS, HIDE.
Hedging this rally. KMLM, CAOS, VIXY.
CAOS has underperformed SGOV in the past years while only gaining 4% this April (before giving it all up). So to use this you not only have mediocre gains, but also need to time the bottom to sell the gains. If you can really time the bottom, then might as well just hold SGOV and buy in TQQQ.
CAOS might be a better hedge against a sharp drop in the market because its value doesn't decay like that SQQQ. However, it works as a hedge only in rapidly declining markets. [https://funds.alphaarchitect.com/caos/](https://funds.alphaarchitect.com/caos/)
Just hold CAOS or TAIL. That's what it's made for.
CAOS has a return of 4% for the past year. Why would use that for anything?
Sell a put, but can be a bit technical. A bunch of ETfs could help, either add BTAL to your portfolio (short high beta) or something like TAIL or CAOS ETF. The later two are designed to hedge and professionally managed.
Usually a crash in the financial markets precedes an economic recession, because the market is forward looking. Also, market timers lose the longer time goes on. Long duration bonds are more volatile than short term ones, and should really pop if central banks decide to save investors through rate cuts. For small rate cuts, a 30 year bond will increase 60x more in price than a 6 month bond. There are other products depending on your level of conviction. Indeed, gold as you mention, whose only real strength as an investment in my view is that it doesn't depend on the strength of the dollar/US economy unlike treasury bonds. As your conviction increases, consider managed futures, puts, inverse ETFs, the CAOS ETF, and selling short. I would hold international equity regardless, but not take any sector bets such as on real estate. It got decimated during the covid crash, by the way.
Good port but this is a possibility. Stagflation. 2022 again on steroids when bonds do not turn green when stocks take a beating. Easy to add a small amount of gold futures, maybe managed futures trend ETF, tail etf like CAOS or anti beta BTAL. Or just commodity focused fund like COM or CTA. Or a combo of some of these.
KLML or CAOS in my opinion, but you need to manage your expectations as they can have VERY long stretches of not doing anything.
When you buy the option, like buying a put, you just pay the premium up front. You cant lose more than the premium paid. If the market never hits the strike, youll just expire worthless and that money will be gone. Maybe if you dont understand this at all you should let a manager handle it. Some products provide equity drop downside hedging via options like CAOS or SWAN.
A hedged equity ETF like HEQT would be an alternative option. It uses a costless put collar spread so you're not just bleeding on the put premiums. There's also TAIL and CAOS, which are pure tail risk protection etfs.
For those wondering like I was where the 2013-2022 history for CAOS came from before it was listed as CAOS this year, it was converted from Arin Large Cap Theta Fund (AVOLX).
CAOS has positive expected returns.
CAOS is best, possibly DBMF or Treasury bonds
Can you please elaborate on that? Wth is CAOS
Let me introduce you to: CAOS