Traders' Roundtable

Does anyone have any thoughts regarding for familiarity with a filter or rule that would serve as some type of crash protection? The filter that I have in mind is a means to stay out of the market, for example, during a 1987 style crash. It wouldn’t have to be a profit making model in and of itself, just some means to occasionally take your chips off the table when things are looking dangerous/overextended. Presumably if the filter was active only infrequently then it should not otherwise disrupt an overall equity curve. I would think simple stop loss orders wouldn’t be enough here --- a violent move would blow through the stops. Buying deep out of the money puts might be one way to relatively cheaply get this type of protection, but it seems as if simply being out of the market would be even cheaper.

Thoughts?

Thanks in advance!

ISBN 0471547387

The difficulty with hedging risk with options is that you have the cost of time premium.....Sluggo's post shows a reasonable enough example but assuming that it's an at-the-money option then you have paid maximum time value. If
the market doesnt move then you will bleed cash.
We currently are replacing all our short interest rate futures positions with options , its not an easy task and may not replicate exactly how our models have worked in the past (with futures only backtesting) but we believe there is risk of short, sharp downside moves and we have tried to hedge this with
minimal impact.