Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 14

The Married Put: Protecting Your Profit

An investor friend was managing a small hedge fund with $200 million in assets. When the markets plunged in 2008, the hedge fund blew up and he lost 35 percent of his trading capital in the span of a few days. He had nonchalantly placed stop-losses of around eight hundred points on a couple of index futures (thinking they would never, ever be hit) with large wagers, and all his stops got hit! He stated, “There was nothing in the history of the markets over the last year or so to warn that such a debacle was coming!” This notion was patently ridiculous. He had also gone long on most of the equity markets and consequently became a casualty of a strong positive correlation, a rare event.

Rare events ...