( Part 2 ) Experts Guide to Tail Risk Strategies

The Mechanics of the trades

Trader friends….

Here are clean, copy-ready delta-anchored templates for each SPX tail-risk strategy.

Each one includes: setup, order ticket, management, sizing, and pros/cons.

1) 1×2 Put Backspread (cheap convexity)

Objective: Low/zero carry hedge that explodes on fast tails.

Setup

• Underlying: SPX (use XSP/ES options if sizing smaller)

• Tenor: ~45 DTE (30–60 DTE ok)

• Structure: Sell 1 × ~35Δ put, Buy 2 × ~20Δ puts

• Entry aim: ≤ small debit or small credit (−0.10% to +0.05% notional typical)

Order Ticket (delta-anchored)

1. Choose expiry ≈ 45D.

2. Find ~35Δ put → Short 1.

3. Find ~20Δ put → Long 2.

4. Nudge strikes to keep net near flat (use 33–37Δ vs 18–22Δ if needed).

Management

• Trigger: If SPX trades through the short strike, roll that short down & out to same delta in next monthly (keep the two longs).

• Take-profits: If move slices through the long strike quickly or you’re up >50% on the structure, take 1/3–1/2 off.

• Abort: If structure drifts to a net debit > target and vol collapses, close and re-establish later.

• Time: Exit/roll ~7–10 DTE if untagged.

Sizing

• Start 1 backspread per ~$1M SPX exposure; cap worst-spot loss ≤ 0.5–1.0% portfolio if SPX settles between short/long at expiry.

Pros

• Very cheap carry; long convexity below long strike; benefits from vol-of-vol spikes.
  Cons

• Risk window between short & long at expiry; requires active rolling when short gets tagged.

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2) Broken-Wing Put Fly (BWP Fly) — financed “body” with tail

Objective: Inexpensive hedge with concentrated payout around body, plus tail protection.

Setup

• Tenor: ~60 DTE (45–75 ok)

• Structure (ratios 1:2:1):

  • Long 1 × ~30–35Δ put (upper wing)

  • Short 2 × ~15–20Δ puts (body)

  • Long 1 × ~5–8Δ put (lower wing) with extra width (“broken wing”)

• Entry aim: low debit (≤ 0.20% notional typical)

Order Ticket

1. Pick expiry ≈ 60D.

2. Long the ~30–35Δ put.

3. Short 2 of the ~15–20Δ put.

4. Long a ~5–8Δ put farther than symmetric to cheapen and add tail (broken wing).

5. Tweak spacing so max potential debit is small and tail isn’t naked.

Management

• If SPX accelerates toward the short body, consider profit-taking (25–50%) and/or widening the lower wingfurther out.

• If body gets tagged with time left, roll body down/out one step to re-center.

• Exit/harvest around 50–75% of max payoff if reached early.

Sizing

• 1–2 flies per $1M notional; ensure max loss at worst spot ≤ 0.5% portfolio.

Pros

• Very low debit, good defined-risk shape, tail wing preserves crash convexity.
  Cons

• Capped payoff near the body; less helpful on slow grinds.

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3) Put Diagonal (LEAPS tail + weekly shorts)

Objective: Structural crash insurance subsidized by short-dated income.

Setup

• Long leg: 12-month ~10Δ SPX put (deep OTM)

• Short leg (systematic): 1–2 week ~30–35Δ puts, rolled continuously

• Entry aim: keep long LEAPS cost affordable; weeklies fund carry.

Order Ticket

1. Buy 1 × ~10Δ put in ~12M expiry (e.g., Jan LEAPS).

2. Each week (or biweekly), Sell 1 × ~30–35Δ put in nearest liquid weekly.

3. Keep short notional ≤ 50–70% of the LEAPS vega/theta you hold.

Management

• Hard rules:

  • Suspend short sales if VIX > ~28, or if SPX < short strike × 1.01 (spot bearing down).

  • If short gets tagged, roll down/out immediately (same delta next week).

• Profit-taking: On vol spike or quick dip, buy back shorts at 50–75% of max gain; let LEAPS ride.

• Refresh the LEAPS annually (roll down/out when it reaches ~6–9M to expiry or IV regime shifts).

Sizing

• LEAPS notional ≈ 0.3–1.0% portfolio premium per year; shorts target to offset 30–70% of that carry (don’t over-harvest).

Pros

• Persistent tail with carry offset; smoother P/L across regimes.
  Cons

• Requires discipline managing weeklies; upside capped if you run collars.

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4) Put Vertical + Tail Wing (ladder)

Objective: Cover typical drawdowns cheaply, keep a disaster kicker.

Setup

• Tenor: 45–75 DTE

• Vertical: Buy ~35–40Δ put / Sell ~20–25Δ put

• Tail add-on: Buy tiny ~5–8Δ put

• Entry aim: vertical debit mostly funds the tail wing.

Order Ticket

1. Pick expiry ≈ 60D.

2. Long ~35–40Δ put; Short ~20–25Δ put (1:1).

3. Add Long ~5–8Δ tail (size smaller, e.g., 0.5–1× of the vertical size).

4. Adjust short delta to keep net debit modest.

Management

• Take profits on vertical if up >50% before big data; keep or roll tail longer-dated.

• If SPX knifes lower fast, scale out vertical first; retain tail as disaster insurance.

• Exit/roll around 10 DTE if untriggered.

Sizing

• 1–3 verticals per $1M notional; tail 0.5–1× that size.

Pros

• Simple, defined risk, inexpensive; tail gives nonlinear pop in crashes.
  Cons

• Provides less protection on slow, persistent declines unless actively rolled.

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5) VIX Call-Spread Overlay (volatility hedge)

Objective: Add convex exposure to volatility spikes that accompany equity selloffs.

Setup

• Underlying: VIX index options (watch settlement mechanics), or VIX futures options on front/mid months.

• Tenor: 45–90 DTE

• Structure: Buy call / Sell higher call (e.g., 25C/35C) 1:1

• Entry aim: small debit; better in contango / low IVR regimes.

Order Ticket

1. Choose expiry 45–90D on the VIX option chain.

2. Long strike near 25; Short strike near 35 (or choose strikes to spend desired debit).

3. Consider 1×2 (long 1 / short 2 farther OTM) only if you’re comfortable with capped payoffs and margin.

Management

• Profit-take tranches on spikes (+8 VIX pts in 1–2 days or >100% on the spread).

• Roll remaining to maintain 45–60 DTE.

• Avoid holding into AM-settlement week if unfamiliar with settlement quirks.

Sizing

• Small but meaningful: e.g., premium outlay 0.05–0.20% portfolio per cycle.

Pros

• Diversifies away from pure equity skew; explosive on gap-down events.
  Cons

• Decay in calm markets; can miss slow bleeds without equity puts.

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6) Rates Proxy Hedge (TLT/TY/ZN call-spreads) — optional complement

Objective: Benefit from flight-to-quality bond rallies during equity stress.

Setup

• Underlying: TLT (ETF) or Treasury futures options (TY/ZN)

• Tenor: 60–120 DTE

• Structure: Call spread (e.g., long 25Δ call / short 10Δ call)

• Entry aim: small debit.

Order Ticket

1. Pick expiry ≈ 90D.

2. Long ~25Δ call; Short ~10–15Δ call.

3. Keep debit small; this is a complement, not a sole hedge.

Management

• Take 50%+ profits on fast bond rallies; roll remainder.

• If selloff is inflationary (bonds fall), don’t add—lean on equity/VIX hedges instead.

Sizing

• Small sleeve (e.g., 10–20% of hedge budget).

Pros

• Diversifies crash pathways; sometimes pays when equity puts lag.
  Cons

• Not all selloffs see bonds rally; can dilute hedge if overweight.

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Universal “How-To” (for any template)

• Pick tenor (Gamma = short; Vega/convexity = long).

• Anchor by delta, not fixed % OTM; deltas self-adjust to vol/time.

• Budget: Commit 0.5–2.0%/quarter of portfolio to hedging across a ladder of expiries (e.g., 45D / 90D / 12M).

• When to add: Prefer low IVR (bottom 20–30% of last 12m) and steep put skew.

• Guardrails: Any financed structure’s worst-spot loss ≤ 0.5–1.0% of portfolio.

• Crash playbook:

  • Tag short? Roll down & out same day.

  • VIX +8 in 48h? Trim VIX hedges 30–50%.

  • Big gap down? Peel profits from near-dated longs; keep LEAPS/tails.

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Quick Delta↔Moneyness (45–60 DTE, rough guide)

• 35Δ ≈ −5% OTM

• 25Δ ≈ −7%

• 20Δ ≈ −9–10%

• 10Δ ≈ −15–18%

• 5–8Δ ≈ −20–25%
  Strike ≈ Spot × (1 − OTM%)

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You got to risk it to get the biscuit !!

Tony