Intro

One of my biggest concerns regarding the financial status of everyday American citizens, whether high-income or low-income, is that they're triple long across every facet of their life.

This means that almost every person you see believes their job, 401(k), and house will keep producing income or climbing in value; and that because of this, they'll be safe.

But that assumption is what keeps millions of people broke. In a black-swan event (a rare, severe, unpredictable market shock) like the 2020 COVID pandemic or the 2008 housing market crash, all three of those long-term bets went south at the same time.

Mitigating Systemic Risk

In 2020, Mark Spitznagel executed one of the most lucrative strategies in modern market history, posting a first-quarter return north of 4,000% while everyone else was bleeding for cash (Bloomberg, 2020).

Mark's fund, Universa Investments, buys short-term options contracts that protect against a sudden market crash ( I'll break down what an option is in the next section).

These contracts are far out-of-the-money and highly convex, meaning small market moves barely change their value, but a massive crash makes their value explode. They only pay off in the event of a major crash.And when they do, they pay off enormously.

So every day, Spitznagel pays a small premium, losing a bit of money the same way you lose a bit of money every month paying for car insurance you hopefully never use. But in the event of a major market crash, Universa makes enough money to cover all of those small losses and then some.

This same logic can be implemented into a portfolio: pay a small, known cost during normal times in exchange for a massive payoff at the exact moment the rest of your portfolio is getting crushed.

What Are Options

Options are a financial derivative: a contract whose value depends on an underlying asset, index, or rate, that gives the investor the right, but not the obligation, to buy or sell an asset at a specific price before a specific expiration date (James Chen, 2025).

The two main types of options are call options, which gain value when the underlying asset's price goes up, and put options, which gain value when the underlying asset's price goes down.

For example, if Stock X trades at $50, and you buy a put option with a $45 strike price that expires in 30 days. If Stock X crashes to $30, you hold the right to sell at $45; your contract is suddenly worth real money. If Stock X stays above $45 through expiration, the option expires worthless and you lose only what you paid for it (called the risk premium).

That risk premium is small compared to the value of the stock it controls, which means options are inherently leveraged: a little money commands a big position. That's what makes them a powerful strategic tool for speculation and hedging against market fluctuations and, it's also what makes them dangerous.

The Tail Risk Hedge

This term lacks a universally agreed-upon definition, however Jeremy Weltmer, a portfolio manager at Goldman Sachs Asset Management, defines the strategy's primary objective: to generate positive, and ideally convex, returns during equity drawdowns, while also aiming for slightly positive returns in more stable market conditions (Goldman Sachs Asset Management, 2026).

Investors use a variety of methods to achieve this objective, such as: buying put options against major indexes, shorting index futures (futures are another financial derivative I'll cover in a later post), and more indirect approaches, like holding gold or foreign currencies.

Anything that carries a negative beta to the overall market is what these investors are hunting for. Negative beta means an asset, or a portfolio, tends to move in the opposite direction of the broader market.

But here's what makes the tail risk hedge strategy genuinely interesting: it produces risk mitigation with upside potential.

Goldman's research shows the hedge doesn't boost returns much on its own.The real benefit appears when the protection lets you take on more market risk everywhere else.

Because the hedge absorbs the worst of a crash, you can afford to hold more stocks than you otherwise could, and that added equity exposure is where the extra return actually comes from (Goldman Sachs Asset Management, 2026).

Implementation Into Your Portfolio

Disclaimer (or exciting news, depending on how you look at it): I plan on going more in depth with the implementation of convexity layers into retail portfolios when I enter university, under an official research branch.

Because as of right now, the research (Goldman's included) reflects portfolios used by institutions, not people like you and I.

You can invest in put options yourself, but the strategy leans heavily on leverage to work. And here's exactly why that's dangerous for retail investors: leverage amplifies everything, so small market moves become big gains or big losses.

On top of that, options expire, if the crash you're insuring against doesn't arrive before your contracts do, they go to zero and you lose 100% of the premium.

Repeat that too many times, or size the position wrong, and then you’ll get eaten by volatility drag.

The "insurance" quietly eats the portfolio it was supposed to protect. Applied incorrectly, leverage plus retail investing is a recipe for total financial ruin.

There are also certain ETFs dedicated to this entire strategy, but an ETF would require a significant amount of portfolio weight (20% to 40%) for the strategy to be even mildly effective.

Compare that to a well-constructed options hedge: Universa's own model portfolio allocated just 3.33% to its tail hedge, kept the other 96.67% in the S&P 500, and came out of March 2020 with a slightly positive return while the index fell 12.4% and was down over 26% at its lowest point (Institutional Investor, 2020).

A tiny allocation delivering massive protection: that's the efficiency of convexity.

But once again, getting there requires complex options positioning and great amounts of leverage, exactly the kind of thing that leads to financial ruin when applied wrong.

What About You?

So where does that leave the everyday investor who's triple long on their job, their 401(k), and their house?

For now: aware. Recognizing that your entire financial life is one correlated bet on "things keep going up" is the first step. The second is knowing that strategies exist,deployed at the highest levels of finance,built specifically to pay off when that bet fails; without needing to predict when.

I plan on researching this in far greater depths in university. With the help of faculty and like-minded individuals, maybe a method to utilize the tail risk hedge in a simpler, safer way for retail investors can be reached. Because protection from the next black swan shouldn't be a tool reserved for institutions.