Dow up 700 points. Nasdaq jumping 4%. Nvidia “reigniting the AI trade” this morning.
You know what I’m hearing? “The bear thesis is falling apart.”
Listen, I’ve been doing this for a long time.
And if there’s one thing I’ve learned, it’s that when everyone’s celebrating and saying the bear thesis is dead, that’s exactly when you need to be thinking about protection.
Here’s What’s Happening Right Now
Nvidia beat earnings. Jensen Huang says Blackwell chip demand is “off the charts.” He’s rejecting the idea of an AI bubble.
The market loves it. AI stocks are flying. Everyone’s piling back in.
But you know what?
This is the perfect example of why we need to talk about hedging against the AI trade unwinding.
The AI trade is so big that if it unravels for any reason, you could see a correction that would likely meet the definition of a black swan event – something no one is expecting.
What Is a Tail Risk Hedge?
A tail risk hedge is an investment strategy designed to protect your portfolio against extreme market events – the “tails” of the probability distribution, like a 2008-style crash.
It usually costs money during normal markets, like an insurance premium, but can pay off significantly during crises.
First, You Need to Define Your Tail Risk
Tail risk equals rare but extreme downside events. We’re talking about a 20-50% equity market drop.
You’ve got to decide what you’re hedging against:
- Equity crash – S&P 500 drawdown
- Credit market stress – corporate bond spreads widening
- Volatility spike – VIX surge
- Interest rate shocks – sudden yield jumps
Second, Pick Your Tail Risk Hedge Investment
A. Long Volatility Strategies (Most Direct)
Buy deep out-of-the-money put options on equity indexes like the S&P 500 and the Nasdaq.
Strike prices 20-40% below current levels, several months to years out. They’re cheap to carry, big payoff in a crash.
VIX calls or futures – VIX tends to explode during market panics.
B. Defensive Asset Allocation
Long Treasuries – especially long-duration like 20-30 year bonds. They historically rally in crises.
Gold – often acts as a safe haven, though not always.
Cash – dry powder and protection against forced selling.
C. Tail-Hedge Funds / ETFs
Some funds specialize in systematic hedging. Cambria Tail Risk ETF (TAIL) is one of them worth investigating.
Third, How to Implement the Hedge
1. Estimate Portfolio Exposure
If you’re 80% equities, a 30% crash means a 24% portfolio drawdown. Decide how much of that you want to insure against.
2. Allocate a Small % to Hedge
Typically, 1-5% of the portfolio is in tail risk hedges. Example: $1M portfolio means you spend $20k-$50k per year on hedges.
And here’s the beautiful thing about today’s market action – with everyone euphoric and volatility crushed, these hedges are probably trading at their cheapest levels in months.
3. Choose Your Hedge Mix
Here’s an example “Crash Hedge”:
- 70% in equities
- 5% in long-dated S&P 500 deep OTM puts
- 10% in long Treasuries
- 5% in gold
- 10% in cash
4. Rebalance & Roll Hedges
Options expire, so you need to roll them. Buy new ones as old ones near expiration. Monitor cost versus effectiveness.
The Timing Couldn’t Be Better
Right now, with the market up huge and everyone convinced the bear thesis is dead, hedges are getting cheaper. VIX calls are probably trading for pennies. Deep out-of-the-money puts are getting ignored.
This is when you want to be buying insurance, not when everyone’s panicking and premiums are through the roof.
Just Remember This About Hedges
They’re costly during calm markets. Hedges usually lose value if nothing bad happens.
Payoff is asymmetric – small allocation can protect a large portfolio.
Best thought of as insurance, not profit-making.
YOUR ACTION PLAN
In the War Room, we put on hedges regularly to protect and profit from everything from bad earnings to economic events and rational and irrational market movements.
Not because we think the market’s going to crash tomorrow, but because we know that when it does crash, it happens fast.
And days like today? When everyone’s convinced the bull market is back and the bears are dead?
That’s exactly when smart money is quietly buying protection.
The next correction isn’t a question of if – it’s when.