Just in time vs Just in case Hedging

The cost of hedging can vary significantly over any given timeframe, and “just in time” hedging is nearly impossible: By the time an investor decides to hedge, the market correction may have already begun, and hedging may have already become expensive. Ideally, then, hedges could be included as a permanent part of an asset allocation and hence would be in place when most needed – what we might call “just in case” hedging. And even in a rising market, TRH can add value, providing a “trailing stop” to the portfolio that may give investors more comfort in maintaining their allocations to risk assets when markets rally.
In fact, some investors may consider a counter-cyclical approach: varying the amount of hedges purchased based on the level of implied volatility. A simple way of accomplishing this is to set a fixed budget and spread purchases over time. If options are expensive, the fixed budget buys less hedging, and if they are cheap, some of the budget can even be held back for a later period as long as the desired hedge ratio is accomplished. And since hedging tends to be cheapest when equity markets are at their peaks, and vice versa, an investor can potentially use this counter-cyclicality to their advantage (see Figures 2 and 3).

 
 

When considering spreading purchases over time, one practical methodology in today’s steep volatility term structure could be to implement 1-year hedges in a laddered fashion, purchasing ¼ of the targeted notional value each quarter. Each tranche would hedge 25% of the total portfolio for 1-year from the execution date, and with a tail risk hedge level that is set relative to market levels on the execution date. In this way, the hedger will have both time and strike price diversity in the hedge portfolio (see Figure 4).

 
Alternatively, one could purchase full n​otional for a quarter and continue rolling 3-month options. One downside of this shorter-dated option strategy is that it comes with little time value. It may be cheaper, but at the same time, if a significant market event takes place, shorter maturity options are unlikely to provide as much of a hedge as staggered longer maturity options do. > From <https://nl.pimco.com/en-nl/insights/investment-strategies/featured-solutions/is-timing-everything-practical-implementation-of-tail-risk-hedging/>