What do you think?
Rate this book
The Second Leg Down: Strategies for Profiting after a Market Sell-Off
Cut risk and generate profit even after the market drops The Second Leg Down offers practical approaches to profiting after a market event. Written by a specialist in global macro, volatility and hedging overlay strategies, this book provides in-depth insight into surviving in a volatile environment. Historical back tests and scenario diagrams illustrate a variety of strategies for offsetting portfolio risks with after-the-fact options hedging, and the discussion explores how a mixture of trend following and contrarian futures strategies can be beneficial. Without a rational analysis-based approach, investors often find themselves having to cut risk and buy protection just as options are at their most over-priced. This book provides practical strategies, expert analysis and the knowledge base to assist you in recovering your portfolio.
Hedging strategies are often presented as expensive and unnecessary, especially during a bull market. When equity indices and other unstable assets drop, they find themselves stuck – hedging is now at its most expensive, but it is imperative to hedge or face liquidation. This book shows you how to salvage the situation, with strategies backed by expert analysis.
Identify the right hedges during high volatility Generate attractive risk-adjusted returns Learn new strategies for offsetting risk Know your options for when losses have already occurred Imagine this you've incurred significant losses, you're approaching risk limits, you must cut risk immediately, yet slashing positions would damage the portfolio – what do you do? The Second Leg Down is your emergency hotline, with practical strategies for dire conditions.
Hedging strategies are often presented as expensive and unnecessary, especially during a bull market. When equity indices and other unstable assets drop, they find themselves stuck – hedging is now at its most expensive, but it is imperative to hedge or face liquidation. This book shows you how to salvage the situation, with strategies backed by expert analysis.
Identify the right hedges during high volatility Generate attractive risk-adjusted returns Learn new strategies for offsetting risk Know your options for when losses have already occurred Imagine this you've incurred significant losses, you're approaching risk limits, you must cut risk immediately, yet slashing positions would damage the portfolio – what do you do? The Second Leg Down is your emergency hotline, with practical strategies for dire conditions.
194 pages, Kindle Edition
Published February 15, 2017
68 people are currently reading
303 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 7 of 7 reviews
January 3, 2018
For a relatively short book, this one takes a little while to read. The very nature of the topic means that some areas are quite dense, and require time to read carefully in order to understand.
One of the key focuses of the book, and in my opinion, the most valuable take away is the focus on tail risk. Here Krishnan reviews a number of strategies (emphasis on options) to manage and profit from these tail risk events.
That said, even investors who don't actively use options will find some benefit from this book, in particular, the numerous discussions of magnitude, frequency and causes of tail events (outliers). It is a helpful reminder that "bad maths" - like common standard deviation and normal distributions - can cause investors to become overly complacent and vastly underestimate both the likelihood and severity of asset price crashes.
One of the key focuses of the book, and in my opinion, the most valuable take away is the focus on tail risk. Here Krishnan reviews a number of strategies (emphasis on options) to manage and profit from these tail risk events.
That said, even investors who don't actively use options will find some benefit from this book, in particular, the numerous discussions of magnitude, frequency and causes of tail events (outliers). It is a helpful reminder that "bad maths" - like common standard deviation and normal distributions - can cause investors to become overly complacent and vastly underestimate both the likelihood and severity of asset price crashes.
October 20, 2024
Academic take on practical hedging
This book falls short of expectations. The strategies in it are implausible and impractical in the real world. It seems as though the author is an academic who hasn’t placed any of these trades in real life.
This book falls short of expectations. The strategies in it are implausible and impractical in the real world. It seems as though the author is an academic who hasn’t placed any of these trades in real life.
April 19, 2020
I’m not a finance professional but I have a strong interest in options.
Even thought this is not a book for beginners in option trading, the author has done a great job using examples and charts to deliver the message.
The book explores fat tail event hedging mainly with options and evaluates different strategies and their risks.
Even thought this is not a book for beginners in option trading, the author has done a great job using examples and charts to deliver the message.
The book explores fat tail event hedging mainly with options and evaluates different strategies and their risks.
November 23, 2022
Hari has a way of making the mundane, interesting. This will certainly be a reference within my library, and a heavily relied upon one whilst I trade/hedge my way through the 2nd stage of this current bear market, and the many that will follow. I recommend that anyone jumping in, to do a quick refresher on their options/derivatives structures. Highly recommend.
January 24, 2023
A very good book. Worth another reading when there is greater availability of financial products in my local markets.
March 29, 2024
This book has notable strengths but also significant shortcomings.
It convincingly explains the benefits of using put ratio spreads, not just to hedge tail risk events but also to extract alpha. Its main idea is as follows. As soon as the market shifts from calm to even slightly fearful, vega, gamma, and skew start working for you simultaneously. You don't have to wait for the multiple out-of-the-money put options you purchased to be in the money. Instead, you can take profits much earlier. It is also reassuring that the potential maximum losses are limited.
I have just made several put ratio spread bets with different characteristics. Fortunately, currently, the situation is just perfect for that. The value of the VIX index is low. I'll assess the results over the next few months and update this review.
I appreciate the author's suggestion to purchase weekly put options when experiencing panic alongside the other market participants. It provides the much-needed reprieve for a few days at a reasonable cost. Weekly put options' prices are only moderately affected by increases in implied volatility. Purchasing them allows you to calmly assess the situation without being forced to close positions urgently in highly unfavorable conditions.
In addition to put ratio spreads, the book describes several other ways to hedge against severe portfolio drawdowns. However, this information did not seem valuable to me.
I agree with the author's suggestion to add trend following for portfolio diversification. However, the method for doing so is unclear. Managed futures ETFs have shown poor performance in recent years.
The author also suggests selling VIX futures and simultaneously buying excess VIX call options when the market is calm. This strategy seems a bit complicated for retail, and the book lacks explanations of combining it with put ratio spreads and which hedging method to prioritize.
This book is worth reading, but be ready for its somewhat bloated content.
See also the paper "Capital Asset Pricing Mistakes" by Mark Spitznagel and others. Its authors recommend their readers buy some 30-35% OTM put options each month. Those options should have 11-12 weeks to maturity. By practicing it, you can increase the leverage and potential return of the investment portfolio without undue risk.
============
UPDATED 29.03.2024.
This book's author explicitly advises to act as follows. Sell one put option with a 25 delta and buy two puts on the same underlying with a 10-12 delta. It's a bad advice! Options with 25 delta are usually only 10-15% out-of-the-money. It is not enough! A stock or ETF can easily fall by 15-20% without any panic in the market. The puts you bought will not work out, and you will incur painful losses.
It is better to do as follows. Sell one put option that is at least 35-40% out-of-the-money. At the same time, buy two puts that are even further out of the money. The delta of all options will be small, but it is OK. Aim for the entire transaction to bring you a 1 or 2 USD premium, including the paid commission. Well, maybe you can capture a 10 to 20 USD premium in some cases, but not more. It may even make sense to part a few bucks instead of trying to capture the premium.
This strategy is a way to make your portfolio more robust. Trying to capture a lot of premium for selling naked put options is a bad idea because it is too dangerous. If you do not have better ideas, sell a small amount of long-dated puts that are 50-70% out-of-the-money for liquid index ETFs (SPY, QQQ) or index futures. But don't mess with stock puts or even sector ETF puts.
It's worth noting that when purchasing put spreads as outlined here, there's almost zero impact on the total required margin of your account. It means that your broker acknowledges the strategy's soundness.
It convincingly explains the benefits of using put ratio spreads, not just to hedge tail risk events but also to extract alpha. Its main idea is as follows. As soon as the market shifts from calm to even slightly fearful, vega, gamma, and skew start working for you simultaneously. You don't have to wait for the multiple out-of-the-money put options you purchased to be in the money. Instead, you can take profits much earlier. It is also reassuring that the potential maximum losses are limited.
I have just made several put ratio spread bets with different characteristics. Fortunately, currently, the situation is just perfect for that. The value of the VIX index is low. I'll assess the results over the next few months and update this review.
I appreciate the author's suggestion to purchase weekly put options when experiencing panic alongside the other market participants. It provides the much-needed reprieve for a few days at a reasonable cost. Weekly put options' prices are only moderately affected by increases in implied volatility. Purchasing them allows you to calmly assess the situation without being forced to close positions urgently in highly unfavorable conditions.
In addition to put ratio spreads, the book describes several other ways to hedge against severe portfolio drawdowns. However, this information did not seem valuable to me.
I agree with the author's suggestion to add trend following for portfolio diversification. However, the method for doing so is unclear. Managed futures ETFs have shown poor performance in recent years.
The author also suggests selling VIX futures and simultaneously buying excess VIX call options when the market is calm. This strategy seems a bit complicated for retail, and the book lacks explanations of combining it with put ratio spreads and which hedging method to prioritize.
This book is worth reading, but be ready for its somewhat bloated content.
See also the paper "Capital Asset Pricing Mistakes" by Mark Spitznagel and others. Its authors recommend their readers buy some 30-35% OTM put options each month. Those options should have 11-12 weeks to maturity. By practicing it, you can increase the leverage and potential return of the investment portfolio without undue risk.
============
UPDATED 29.03.2024.
This book's author explicitly advises to act as follows. Sell one put option with a 25 delta and buy two puts on the same underlying with a 10-12 delta. It's a bad advice! Options with 25 delta are usually only 10-15% out-of-the-money. It is not enough! A stock or ETF can easily fall by 15-20% without any panic in the market. The puts you bought will not work out, and you will incur painful losses.
It is better to do as follows. Sell one put option that is at least 35-40% out-of-the-money. At the same time, buy two puts that are even further out of the money. The delta of all options will be small, but it is OK. Aim for the entire transaction to bring you a 1 or 2 USD premium, including the paid commission. Well, maybe you can capture a 10 to 20 USD premium in some cases, but not more. It may even make sense to part a few bucks instead of trying to capture the premium.
This strategy is a way to make your portfolio more robust. Trying to capture a lot of premium for selling naked put options is a bad idea because it is too dangerous. If you do not have better ideas, sell a small amount of long-dated puts that are 50-70% out-of-the-money for liquid index ETFs (SPY, QQQ) or index futures. But don't mess with stock puts or even sector ETF puts.
It's worth noting that when purchasing put spreads as outlined here, there's almost zero impact on the total required margin of your account. It means that your broker acknowledges the strategy's soundness.
December 24, 2022
Great book
Displaying 1 - 7 of 7 reviews