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P. Neo, C. Tee: “Tail Risk Hedging: The Search for Cheap Options”

March 10, 2023

We find that a simple heuristic of sorting liquid equity options by dollar price to construct a portfolio of cheap put options leads to a surprisingly robust tail risk hedge – the superior performance holds even when compared against advanced empirical option strategies. Further investigation reveals the asymmetry in market correlation under different market conditions as the mechanism of this robust hedging performance.

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