Drawdown Protector

Drawdown = (Peak Value - Current Value) / Peak Value × 100%. Track your highest portfolio value (peak). When portfolio is below peak, calculate the percentage difference. Example: Peak $100K, Current $88K → Drawdown = 12%.

Start with standard: Yellow at 5%, Orange at 10%, Red at 15%, Critical at 20%. Adjust based on your risk tolerance - tighter if conservative, wider if aggressive. Write them down and commit to them.

Yes, that's the discipline that makes this work. The whole point is to protect capital before losses become catastrophic. It's hard to sell when down, but easier than recovering from 50% losses. Trust your rules.

You'll have less exposure and miss some gains. That's the cost of protection. But you'll also have capital if it doesn't rebound. This is why we have recovery rules - you re-enter as conditions improve. Missing some upside is better than catastrophic loss.

Daily at minimum. In volatile markets, multiple times per day. Set alerts at your threshold levels. The sooner you know you've breached a threshold, the sooner you can protect.

Puts: defined cost, unlimited upside, no decay for holding (just time decay). Inverse ETFs: no options needed, easy to buy/sell, but daily reset causes decay over time. Puts better for weeks/months; inverse ETFs for days/short weeks.

Typical budgets: 1-3% of portfolio value per year. Buy when volatility (and put prices) are low. The protection should be meaningful - enough puts that they'd offset a significant portion of a 20%+ decline.

For 1x inverse: Hedge = Portfolio × Beta × Hedge %. For 2x inverse: divide by 2. Example: $100K portfolio, beta 1.1, want 50% hedge with 2x inverse → (100K × 1.1 × 0.5) / 2 = $27,500 in 2x inverse ETF.

Buy when VIX is low (< 15) - protection is cheap. When VIX is high (> 25), protection is expensive but you might need it urgently. Ideal: have protection in place before you need it, bought when cheap.

Use confirmation: don't change zones on single-day moves. Require 2-3 consecutive days in new zone before acting. Use buffer zones (act at 10.5% not exactly 10%). Gradual changes rather than binary all-or-nothing.

Define floor (max acceptable loss), multiplier (typically 3-5). Calculate: Cushion = Portfolio - Floor. Risky Allocation = Multiplier × Cushion. Rebalance when allocation drifts significantly. As portfolio approaches floor, risky allocation goes to zero automatically.

Work backward: In a 30% crash, what do you want the hedge to pay? Say $30K. Buy enough OTM puts (e.g., 80% strike) that their delta × notional × expected move = $30K. Budget 0.5-1% annually for tail hedges.

Break drawdown into: Market (beta × market return), Sector (sector weights × sector returns), Stock-specific (residual). Identify largest contributors. If one position/sector dominates, consider specific hedge for that exposure.

Yes. In bull markets (price > 200MA, low VIX): widen thresholds (allow more drawdown before acting). In bear markets: tighten thresholds (protect faster). Document your regime rules and thresholds for each.

Risk budgets per strategy, hard stop levels with mandatory review, VaR limits, daily loss limits. All documented in investment policy. Key: governance (someone reviews), documentation, and discipline. Apply these principles to your own approach.