If people are interested in seeing this in action an investor employing this strategy is Bill Ackman who famously benefited during the 2020 March crash. I believe that he has a similar bet back in place now which is interesting. The idea is to buy a undervalued or "cheap" hedge when you see it and not to time the market. I think that the main advantage for me currently with index put options that may not be readily apparent is I'm fully invested and after this last year have a lot of short term unrealised gains. Put options allow me to protect the majority of my downside for 0.5 - 1% allocation per month once we get past March/April maybe cash will be better.

Not at all I'm using interactive brokers. You have to do a little quiz when you sign up to trade options but its no big hassle. The web portal however is clunky, gets the job done. The instrument is buying puts on the QQQ ETF.

See previous macro discussions about my overall opinion about the price of everything. I have somewhat capitulated and only hold 10% cash now. It’s difficult to see where to put funds to work to achieve a return commensurate with the risk. I have paid down some investment mortgage debt, and rebalanced from overvalued tech stocks into a few commodity producers. Not something I usually hold. Whilst it’s easy to see things crashing at any point, it could easily keep going for a few more years. It’s uncharted territory and no one has a clue. This combination of interest rates, QE, inflation and asset prices has never existed before. EVER. In history. So no one really has a clue Interesting times.

Does the BBOZ ETF work? It's leveraged and effectively doubles the hedge on capital invested. I recently restructured my portfolio to be 50% hedged by investing 25% of my capital in BBOZ. Like you I won't use it all the time but I'm concerned about the massively inflated market right now. Also, I may not be doing it right but the above is how I had it explained to me

Well this was a good idea! Also nice work umop!

I used BBOZ last year. It ended up costing me dearly. A fairly blunt instrument. But it did expose how fragile my portfolio was (slightly leveraged, without any non-correlating hedge) . So, learning form my mistakes, and to build some anti-fragility, I have eliminated all debt, with a LOC loan open if I need it, and a 15% hedge consisting of Gold/ Silver/Bitcoin/gold miners. The idea is, this hedge has a low correlation to the broad equities market, although in big falls, everything goes down in the short term as margin calls generally triggers a sale of everything not nailed down. The other part of the equation is investing in businesses that have no debt, have high GMs, and have secular tailwinds driving demand for their products / services. Although, ironically, some gold miners in my hedge have a fair bit of debt. The idea is to be able to get to the other side of the downturn, without being forced to liquidate at the worst time, and, ideally pick up some bargains along the way.

Yeah I guess Im looking for a negative correlation so holding cash or leveraged short makes the most sense to me. The logic is buy the put in USD on the QQQ index (likely to fall further in a draw down due to unprofitable tech companies and generally high valuations) plus likely to see the USD go up comparatively to the AUD as there is a flight to safety. A 40% drawdown would roughly be mitigated by more than half but also you get a big chunk of cash to deploy during the market drawdown (which is fun). As kind of alluded to in the article this is potentially a positive EV strategy at least historically at times of high valuations (I'm not sure thats true now because of the increased cost of the options due to volatility). The downside is it has a negative carry and you end up torching a bit of your portfolio every month you have it on (psychologically this is hard). All that said I'm not sure it has a great advantage over just holding cash which provides the same negative correlation. I get the gold/silver/bitcoin argument but during drawdowns they appear to drop at least in the early phases. Don't want to hold inverse ETFs as I suspect the EV is definitely negative for that bet. I suspect not many investors holding too much in cash at this point. Got to be the most hated asset out there at the moment.