Tail hedge
Definition · Level 8 · Risk & portfolio
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Cheap far-out-of-the-money protection (index puts, VIX calls) that bleeds premium in normal times and pays off in crashes.
Example
Spending 1.2% of NAV a year on 20%-OTM SPX puts.
Where Tradecraft teaches it
Level 8 · Risk & portfolio, in the lesson “Hedging & portfolio process”: Hedge ratios, basis and counterparty risk, the cost of tail hedges, and the process habits that keep risk under control.
Related terms
- Counterparty riskThe risk that the other side of a trade — a dealer, broker or OTC swap partner — fails to pay or deliver what it owes.
- Outcome biasJudging a decision by how it turned out rather than by the information and process behind it — e.g. praising a rule-breaking trade because it…
- RebalancingTrading back to target weights after market moves cause drift, on a calendar or when a threshold is breached.
- Trading journalWritten log of each trade’s setup, entry, stop, size, R result and emotional state, used for later review.
- 1RThe dollar amount at risk on a trade — entry-to-stop distance × size — used as the unit for measuring every result.
- AlphaReturn earned above what the asset’s market exposure predicts: Rp − [Rf + β(Rm − Rf)].