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Understanding Tail Risk

edited November 2021 in Other Investing
This may be of interest to a few. I’ve recently placed a small bet on TAIL and wanted to learn more about how it works. The fund utilizes put options for defense. Seemed like a better defensive approach than inverse funds. This article doesn’t pertain to TAIL specifically, but helps understand the fund better.

I don’t agree with all the advice in the article - particularly holding much cash (but I do invest in short-intermediate government & other investment grade debt to some extent). Also mentions gold. Just know that precious metals / miners are fraught with peril. Took off like a jack-rabbit out of h... today after the hot inflation numbers.

The article explains how put options work better than anything else I’ve come across. Even my dense brain finally understands what they are.



  • edited November 2021
    Thank you. Gold is trending upward this week as inflation increases; announced 6.1% this morning.

    Not a hedge but letting the cash invested in VTIP and bank loan funds.
  • I'd stay away from buying TAIL, which was not a great hedge. It could only work out if we have a market collapse, and you time it exactly.

    FT Cboe Vest Fund of Deep Buffer ETFs (BUFD) has been on my watchlist for a defensive options play.
  • Hi @hank. I've been using JHQAX as a 'alternative' equity options strategy. I'm very please so far. Nice steady-eddie trends. I don't know exactly how the strategies differ, but it has far out performed TAIL this year. Must be a lot of shorting in TAIL(?) I didn't want a fund or ETF that was only made to do well in down markets which that one appears to be. That doesn't make sense to me as a mostly buy and holder.
  • edited November 2021
    @JD_co & @MikeM

    Thanks for the pointers. Will check them out. TAIL gained over 20% in Qtr. 1 2020. (Guess that met the definition of a collapse.). I’ve had it 2-3 weeks and it looked rock steady. But didn’t hold up well today.

    Compared to the inverse Dow (DOG), which I played around with, TAIL has been less volatile over the time it’s been in existence. I’d agree with @JD_co that it’s not going to make you money in decent markets. FWIW - Here’s a cut & paste of its strategy:

    “The Cambria Tail Risk ETF seeks to mitigate significant downside market risk. The Fund intends to invest in a portfolio of "out of the money" put options purchased on the U.S. stock market. TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high.”


    Side note: Musk wanted to sell some Tesla. But didn’t want to “spook” the market. So he set up this Twitter gig to make it look as if he were being coerced into selling by his loyal followers. (There are reports his brother sold a big chunk the prior day.). The market didn’t buy it. Now - push hard on the sky-high technology sector and it can set in motion a whole chain of unwanted consequences.

  • CEOs of other high flying stocks are also selling. Evidently, AMC CEO sold 1/4th of his holding and has filed to sell another 1/4th.
  • Great explanation of Musk sales

    Copied below if interested if you cannot open paywall

    Oh Elon

    Well here you go sure sure sure:

    Tesla Inc. Chief Executive Officer Elon Musk unloaded $5 billion of stock in the electric-car maker, shortly after restoking a social media debate over the tax treatment of billionaires’ shareholdings.

    The world’s richest person so far has disposed of more than 4.5 million shares this week, according to regulatory filings. Those were his first sales in more than five years.

    Musk, who frequently stokes controversy on Twitter, created a firestorm over the weekend with a survey asking whether he should sell part of his Tesla stake. While he portrayed his proposal as having to do with debate over the ultra-wealthy avoiding taxes, the filings released Wednesday show some of the transactions were pre-arranged in mid-September -- weeks before the poll. He also didn’t mention in the tweets that he has millions of stock options that must be exercised before next August, when they expire.

    There are two sets of sales. On Monday, he exercised 2.15 million stock options that were granted in 2012, paying about $13.4 million to acquire 2.15 million shares; then he sold 934,091 of those shares for about $1.1 billion. The Form 4 disclosures for the exercise and sales are here and here. Footnote 1 of each of Musk’s Form 4s says: “The transactions reported on this form 4 were automatically effected pursuant to a Rule 10b5-1 trading plan previously adopted on September 14, 2021 and established by the reporting person for the purpose of an orderly sale of shares related to the exercises of options scheduled to expire in 2022.” Actually it says that in all caps. I like my readers so I rendered it in sentence case for readability, but now I’m going to say it again in all caps, for accuracy but also for emphasis: “THE TRANSACTIONS REPORTED ON THIS FORM 4 WERE AUTOMATICALLY EFFECTED PURSUANT TO A RULE 10B5-1 TRADING PLAN PREVIOUSLY ADOPTED ON SEPTEMBER 14, 2021 AND ESTABLISHED BY THE REPORTING PERSON FOR THE PURPOSE OF AN ORDERLY SALE OF SHARES RELATED TO THE EXERCISES OF OPTIONS SCHEDULED TO EXPIRE IN 2022.”

    On Tuesday and Wednesday, he sold a total of about 3.6 million of the 170.5 million shares that he already owned (i.e. not shares subject to options), for proceeds of about $3.9 billion. There are a bunch of Form 4s for these sales (here, here, here, here, here, here, here, here).[1] They do not mention a prearranged 10b5-1 plan; presumably he decided to sell them this week, and then did.

    Some background. First, in September, a few weeks after he put this Rule 10b5-1 plan in place, he said publicly at a conference that “a huge block of options will sell in Q4 — because I have to or they’ll expire.”[2] He has 22,862,050 options in the tranche set to expire next August; he exercised 2.15 million of them on Monday, leaving him with about 20.7 million options in that “huge block” that he plans to “sell in Q4.”

    Second, this past Saturday, Musk tweeted a poll. “Much is made lately of unrealized gains being a means of tax avoidance,” he wrote, “so I propose selling 10% of my Tesla stock. Do you support this?” In a second tweet, he said “I will abide by the results of this poll, whichever way it goes.” The poll closed on Sunday, with 57.9% of the votes in favor of Musk selling 10% of his stock.

    It is not clear what “10% of my Tesla stock” means. At the time of the poll, Musk owned about 170.5 million shares of Tesla stock. But he was also, for legal purposes, the “beneficial owner” of another 73.5 million shares underlying options; Tesla’s filings show him owning 244 million shares. So if Musk were to sell 10% of his stock that would mean selling somewhere between 17 million and 24 million shares, give or take.
  • edited November 2021
    Re TAIL (etf)

    I’ve come upon a better description of the strategy. In particular, the fund (TAIL) relies on intermediate, rather than long term treasuries (as I earlier stated) for ballast, while purchasing put options. The manager explains that under normal conditions, the fund is expected to lose money.

    Excerpt: “The Cambria Tail Risk ETF seeks to mitigate significant downside market risk. The Fund intends to invest in a portfolio of "out of the money" put options purchased on the U.S. stock market. TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries. As the fund is designed to be a hedge against market declines and rising volatility, Cambria expects the fund to produce negative returns in the most years with rising markets or declining volatility.”


    Here’s a related bit of information cited in “Up & Down Wall Street” (Barron’s, Nov. 15). Eric Metz, an options trader is credited by Randall Forsyth as providing the following advice:

    “Metz (recommends) taking advantage of a current anomaly in the options market. Premiums on calls on the Nasdaq are higher than those on put options—the reverse of the usual skew. Typically, hedgers pay higher premiums on puts to ensure against the downside of their holdings. But bullish enthusiasm currently is making for higher premiums on upside calls.”
  • I have had a small position since 2019. It has done what I expected, ie buffered market declines.

    March 2020 Tail was up 27% to SPY drop of 31%. It is down about 15% since I bought it, far less than inverse ETFs like SH which lost over 50%
    It also pays about .7 to 1%

    the usual advice is to rebalance to maintain the same % in your portfolio. That would work pretty well I think
  • Thanks @sma3 for reporting.
    Enjoy your Sunday, Derf
  • edited November 2021
    Thanks @sma3

    I’ve considered these type of “fringe” investments as potential speculative / timing tools. But the thought of maintaining a constant weighting is most interesting. With interest rates so low, bonds no longer offer the downside protection they once did. Even the managers at PRPFX have reduced bond exposure and ditched longer dated bonds in favor of short term ones.*

    *See my Barrons Thread

  • This CHART is TAIL vs SPY for one year (253 business days). You may drag (left) at the 253 day area and travel backwards for a moving one year period, OR you may right click the 253 day and select ALL (or other choices) to view the total pattern back to the 2017 inception date for TAIL. You may ALSO right click in the chart and select ANIMATE. ANIMATE is not encouraged if one has consumed excess alcoholic beverage or has other certain medical circumstances.:)
    Remain curious,
  • edited November 2021
    @Catch22 - Thanks for the chart. As you know, TAIL isn’t designed to make money over longer periods. The manager expects negative returns most years. So, not sure what to compare it to in a day and age when stocks only go up.

    Others I’ve looked at:

    SWAN About 90% treasuries and buys longer dated call options on the S&P (passive management)

    DRSK About 90% investment grade corporates and buys longer dated call options on selected stocks.(active management)

    FTLS About 70% long and 25-30% short on selected stocks (active management)

    Here’s my favorite one conceptually - DFND, which shorts stocks that it thinks will pay lower dividends in the future and goes long on stocks it thinks will grow their dividends. It’s considered defensive in the sense that investors tend to rush into dividend paying stocks during times of market stress. Generally good reviews. The problem is it bounces around a lot and is currently on an uptick. I would only buy in after a prolonged period of weakness.
  • Yes, I understand what you're expressing/your point. Charts lend a nice view, for me.
    When bonds had more correlation to equity moves, this chart provides an interesting view. If one was really astute about market moves, a sell/buy rotation between EDV (Vanguard long bond) and SPY would have paid a handsome return over the years. From the chart begin (limited by EDV inception) one's money would have returned the same value through March, 2017, for EDV and SPY. Most folks would never guess this, if the question were on an exam.
    And yes, one may still make money with hard play in in a play between TBT (rising rates) and TMF (falling rates); or others.

    You may plug in any of the tickers you listed, as the chart link is an active/to use chart.

  • Cool! Thanks @Catch22
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