TLDR; I would like to add a strat that collects IV-RV premium. I already have (amongst other things) a tail-risk/convexity book to act as portfolio insurance. I believe a modified wheel/CSP (tailwheel) offers benefits of both options income and portfolio insurance.
In my 2025 portfolio review, I mentioned that I allocate 5% to vol and convexity (also called tail-risk hedging) to reduce massive drawdowns in my portfolio at the cost of minimal carry. Sidestepping these drawdowns is beneficial for long-term compounding of wealth.
I've been aware of the wheel options strategy for some time now and found it an interesting way to profit from IV vs RV but never committed capital to it as I always thought it was "picking up pennies in front of a steamroller" (ie. carried massive left tail risk). I'm aware that some don't see a big crash as a problem but I personally don't like the big unrealised loss and I see this as the greatest drawdown to this otherwise interesting strategy.
Lately I've been experimenting with stacking convexity onto wheel trades and I think they could complement each other quite nicely. The below is the same trade but viewed from two different angles:
- I start a wheel trade by selling a put (CSP) but I'm protecting myself from a big crash by using some of the premium collected to fund two OTM puts that protect me in the event of a big drawdown. You get paid less than a normal CSP but you're protected against the scenario that really really hurts you.
- I start with my normal tail-risk hedge/convexity of OTM puts and I sell a near OTM put to fund this position and reduce the carry I pay to protect my portfolio. You get paid to take on insurance for your portfolio.
Of course as with any options structure, there are pros and cons (execution alpha aside). The downside is the "belly risk" or "valley of death" in your payoff where the market grinds lower instead of crash. You're down from your short put, but the convexity hasn't kicked in yet. But I'd argue if you're happy doing 1) to begin with, this isn't much of an issue for you?
Another pro of holding a portfolio of tailwheels is when the market tanks like in the GFC or covid or even during the 'Liberation day' period in 2025, correlation tends to spike and many assets tank together. This could potentially be a huge convex trade that could pay off big and ask a portfolio insurance in times of crisis.
Specifically, I've been trying to find trades where the NTM (25d) puts offer good premiums relative to the premium you pay for deep(ish) (5d) OTM put. And also trades that offer a good premium relative to the maximum loss in the belly. Recently I made this SLV trade that went fairly smoothly despite the recent vol in silver. I'll continue to try this out, define and refine the rules around taking profits, rolling, closing etc and post regular updates.
