Why I keep a 20-30% hedge ratio...

Here is a thought I keep coming back to.

Before the end of the decade, the market is likely to have a problem.

These things take a ridiculously long time to actually materialise though. People were calling the GFC in 2005, 2006 when they saw credit starting to blow up. Equities didn't wake up until October 2008. Two to three years after the credit signals first started flashing.

The wake-up call can take a long time to arrive. But it's good to be prepared and have a game plan.

That's where options help. They give you patience.

You throw a bit of protection in the book and stay invested. When you start getting more signals from other asset classes that things aren't right, you put more protection on. You scale that protection in and out.

Optionality buys you patience. You can be right at the wrong time and still be in the game when the move shows up.

That last line is the whole game. Calling the top early is how a lot of traders get blown out before the top actually arrives, because the position they put on doesn't survive the wait. Optionality is what lets you wait.

My hedge ratios tend to sit in the 20-30% range these days. Enough to take some sting off if something cracks. Light enough that I'm not bleeding myself dry waiting for it.

The point is staying in the game long enough that the eventual move pays you when it shows up.

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