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The Second Leg Down

Book Description

Cut risk and generate profit even after the market drops

The Second Leg Down offers practical approaches to profiting after a market event. Written by a specialist in global macro, volatility and hedging overlay strategies, this book provides in-depth insight into surviving in a volatile environment. Historical back tests and scenario diagrams illustrate a variety of strategies for offsetting portfolio risks with after-the-fact options hedging, and the discussion explores how a mixture of trend following and contrarian futures strategies can be beneficial. Without a rational analysis-based approach, investors often find themselves having to cut risk and buy protection just as options are at their most over-priced. This book provides practical strategies, expert analysis and the knowledge base to assist you in recovering your portfolio.

Hedging strategies are often presented as expensive and unnecessary, especially during a bull market. When equity indices and other unstable assets drop, they find themselves stuck – hedging is now at its most expensive, but it is imperative to hedge or face liquidation. This book shows you how to salvage the situation, with strategies backed by expert analysis.

  • Identify the right hedges during high volatility
  • Generate attractive risk-adjusted returns
  • Learn new strategies for offsetting risk
  • Know your options for when losses have already occurred

Imagine this scenario: you've incurred significant losses, you're approaching risk limits, you must cut risk immediately, yet slashing positions would damage the portfolio – what do you do? The Second Leg Down is your emergency hotline, with practical strategies for dire conditions.

Table of Contents

  1. Cover
  2. Title Page
  3. Copyright
  4. Dedication
  5. Preface
  6. Acknowledgements
  7. About the Author
  8. Chapter 1: Introduction
    1. The Airplane Ticket Trade
    2. The Bull Cycle
    3. The Renegades
    4. Claws of the Bear
    5. Zugzwang
    6. The Sceptics
    7. A Sad Truth
    8. Common Mistakes
    9. Imprecise but Effective
    10. Hedging Against Implausible Scenarios
    11. A Black Swan in Correlation
    12. Taking Profits
    13. The Good, the Bad and the Ugly
    14. The Great Escape
    15. Having a Plan
    16. Trend Following as a Defensive Strategy
    17. Taking the Offensive
    18. The Pre-Conditions for Market Crises
    19. Banks: The Great Multiplier
    20. A Change in Risk Regime
    21. Endnotes
  9. Chapter 2: “Safe” Havens and the Second Leg Down
    1. The Matterhorn
    2. Mrs. Watanabe's No. 1 Investment Club
    3. The Risk of What Others are Holding
    4. The Risk of What Others are Likely to Do
    5. Here We Go Again
    6. Summary
    7. Endnotes
  10. Chapter 3: An Overview of Options Strategies
    1. The Building Blocks: Calls and Puts
    2. Why Buy a Call or Put?
    3. The Black–Scholes Equation and Implied Volatility
    4. The Implied Volatility Skew
    5. Hedging Small Moves
    6. Delta Hedging: The Idealised Case
    7. Practical Limits of Delta Hedging
    8. Hedging Options with Other Options
    9. Put and Call Spreads
    10. Straddles and Strangles
    11. The Deformable Sheet
    12. Skew Dynamics for Risky Assets
    13. The 1×2 Ratio Spread and Its Relatives
    14. The Batman Trade
    15. Implied Correlation and the Equity Index Skew
    16. From Ratios to Butterflies
    17. Calendar Spreads
    18. Summary
  11. Chapter 4: Hedging the Wings
    1. Taking the Other Side of the 1×2
    2. Comparing the 25 and 10 Delta Puts
    3. Hedging Sovereign Bond Risk
    4. Selling Put Ratio Spreads on the S&P 500
    5. The Hypothetical Implied Distribution
    6. Our Findings So Far
    7. Back-Tests: A Cautionary Note
    8. A Short Digression: Delta-Neutral or Comfortably Balanced?
    9. The 665 Put
    10. Implications of the Square Root Strategy
    11. Futures vs Spot
    12. A Dramatic Example
    13. A Cross-Sectional Study
    14. The “New” VIX: Model-Independent, Though Not Particularly Intuitive
    15. The Spot VIX: Oasis or Mirage?
    16. Migrating to VIX Options
    17. Reflections on Figure 4.36
    18. Migrating to Different Markets: The V2X
    19. Risk-Regime Analysis
    20. Conditional Performance of Hedging Strategies
    21. Summary
  12. Chapter 5: The Long and the Short of It
    1. Short-Dated Options
    2. The Physicists Weigh In
    3. Buying Time
    4. Long-Dated Options
    5. Far from the Madding Crowd
    6. R Minus D
    7. The Lumberjack Plot
    8. Selective Application of the Weekly Options Strategy
    9. Summary
  13. Chapter 6: Trend Following as a Portfolio Protection Strategy
    1. What is Trend Following?
    2. Trend Following Dogma
    3. The Crisis Alpha Debate
    4. An Aside: Diversifying Across Time
    5. Taking Advantage of a Correction
    6. The Niederhoffer Argument
    7. Chasing 1-Day Moves
    8. Pushing the Analogy Too Far
    9. Analysing the Data Directly
    10. LEGO Trend Following
    11. Summary
    12. Notes
  14. Chapter 7: Strategies for Taking Advantage of a Market Drop
    1. The Elastic Band
    2. Trading Reversals
    3. More Texas-Style Hedging
    4. Selling Index Put Spreads
    5. Breathing Some Life into the Equity Risk Premium
    6. Buying VIX Puts
    7. Selling VIX Upside
    8. The Remarkable Second Moment
    9. Summary
  15. Chapter 8: “Flash Crashes”, Crises and the Limits of Prediction
    1. Lord of the Fireflies
    2. Cascading Sales
    3. A Concrete Example
    4. An Aside
    5. Paths, Prints
    6. The Role of the Central Bank
    7. Credit Cycles at the Zero Bound
    8. The Monetary Policy Palette
    9. Reading the Tea Leaves
    10. Summary and Conclusion
  16. Glossary
  17. References
  18. Index
  19. End User License Agreement