Life Is Better When HEDGED

Category: sports

  • The Body and the Tails

    The Body and the Tails

    I am not going to lie; I am strong for my age group.

    Last year, I hoisted 225lbs over my head while performing the strict press. My body weight was 226lbs at the time.  

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    This link to video on X (formerly Twitter) is the proof.

    I have always been motivated to work out and stay healthy. I think it is because I subconsciously know that a healthy body leads to a healthy mind and a longer life. Plus, it doesn’t hurt to see yourself looking good in the mirror!

    The human body is an amazing and complex machine, with different parts interacting with each other in ways that we never would have dreamed of decades ago.  Bones can affect the mind due to the billions of genes that interact together. This is just one example of how complex the human body is. 

    It is very hard to look at almost anything in isolation anymore. 

    It is clear that the stock market is not determined by a single player, but rather by the collective action of millions of investors who set prices and direct trillions of dollars in investments around the world.

    The parts make up a whole.

    Now, I know some of you who have been nice enough to take the time to read some of my other posts know that I am interested in tail hedging.  

    We also need to think about the body when we think about the tails. Just like when my body communicates to my mind when I press 225lbs over my head..  The body and the tails are interconnected.  You cannot understand one without the other.  

    Understanding their relationships is the key to understanding a successful tail hedging strategy.  

    Have a great day,

    James

  • What can a bad NFL trade teach us about tail risk hedging?

    What can a bad NFL trade teach us about tail risk hedging?

    April 2, 2022

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    A few weeks ago, I saw an interesting statistic on a football player from the Chicago Bears and I realized that it could teach a lesson for tail hedgers.  I know not everyone is interested in American football, but being from Chicago, football is something that I cannot ignore.  Hopefully, using sports as a metaphor will be a little more exciting than the usual tail hedge terminology.  Which, quite frankly, is kind of boring. 

    Khalil Mack, a defensive end, was drafted in 2014 by the Oakland Raiders.  He played four seasons of outstanding football and became a well-respected player.

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    In 2018, the hapless Chicago Bears decided to sign Mack to a much larger contract.  Unfortunately, they ended up not getting much in return. 

    What mistake did the Chicago Bears make?  They overpaid for the same performance! Mr Mack did not exceed his previous level of play in Oakland.  

    I am not trying to play Monday morning quarterback. Selecting the proper players and building a winning team is not easy, unless you are the New England Patriots. However, perhaps the Bears might have asked themselves whether paying five times the old contract was worth it. 

    Overpaying for tail hedges or any option for that matter can hurt just like overpaying for defensive ends.  That is why we are trying to hedge when prices are cheap and no one is demanding our hedges.  

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    Rising prices for protection do not guarantee that you will lose money, you just have less room for error and need future performance to exceed expectations.  If Khalil Mack exceeded his performance with the Raiders while he was with the Bears, his contract would have looked less ridiculous.  

    Buying a tail option for a moderately high price might turn out ok if the market has a large crash.  The Expectation of future performance would be closer to realized performance.  Similar to realized versus implied volatility. A subject for another post!

    Price always matters.  The cure can be worse than the disease.  For the Chicago Bears, passing on Mack might have cost them nothing.  Passing on an expensive hedge because it is too late might make more sense than overpaying.

    Best,

    James

    PS-  The Bears never made the playoffs with Mack. Two losses in the wildcard round.