The podcast discusses the concept of the vibranium shield, a financing hedge combo that absorbs market volatility. It explores the bomb shelter strategy for extreme market events and the importance of discretion in trading strategies. The episode also covers budget calculation, target returns, and the performance of the vibranium shield hedge. It concludes with a discussion on hedging on non-crash years and surplus returns.
The Vibranium Shield strategy acts as a financed supplemental hedge combo that absorbs market volatility and generates profit during major crashes.
Running the Vibranium Shield strategy involves entering a suite of long puts with a 90-day time to expiration and 1.5 delta, aiming to cover the cost of the hedge through the income generated by the theta engine.
Deep dives
Introduction and Purpose of the Vibranium Shield
The podcast episode introduces the Vibranium Shield as the third and final piece of the Trinity System. The Vibranium Shield is a financed supplemental hedge combo named after the metal in Black Panther's armor that absorbs and stores energy. The purpose of the Vibranium Shield is to act as a hedge that absorbs market volatility and generates profit during major market crashes. The name reflects the idea that the shield remains dormant and does nothing most of the time, but releases its stored energy during a Black Swan event. However, it is emphasized that running a free hedge is not possible and there are always associated risks and costs involved.
Entry and Financing Mechanics
The Vibranium Shield strategy involves entering a suite of long puts with a 90-day time to expiration and 1.5 delta. The entry frequency can vary, but daily entries are preferred. The budget for the long puts is determined based on a percentage allocation, such as 3% of the total account value. The financing is done through the theta engine portion, where the target return is set equal to the budget allocated for the long puts. The goal is to use the income generated by the theta engine to cover the cost of the hedge. The overall strategy is designed to be optional and can be used as a supplemental hedge to other strategies or as a standalone downside protection.
Results and Challenges of the Vibranium Shield
The podcast episode examines the results of running the Vibranium Shield strategy in various market scenarios. The analysis includes years such as 2007, 2008, 2014, 2015, 2018, and 2020. Results vary depending on the market conditions and the effectiveness of the hedge in relation to the income strategy. It is noted that years with major crashes, such as 2008 and 2020, have positive net returns when the hedge is monetized. However, there are also years like 2007 and 2018 where the hedge may not fully offset losses from the income strategy. The complexity and challenges of hedging are highlighted, including the unpredictability of market events and the need for discretion in exiting the hedge positions.
Understanding the Risk and Surplus of the Vibranium Shield
The podcast episode emphasizes the need for realistic expectations and understanding of the risk involved in running the Vibranium Shield strategy. It is noted that there is a trade-off between the potential benefits and the costs associated with the hedge. The risk of potentially increasing losses during certain years, such as 2007 and 2018, is discussed. The surplus generated by the hedge, which represents the additional net return beyond the cost of the hedge, is highlighted. This surplus can vary depending on the monetization of hedge profits. Overall, the goal is to provide context for running the Vibranium Shield and help individuals make informed decisions about implementing this strategy.