Core Viewpoint - The article discusses historical market crashes and the strategies employed by various investors during these crises, highlighting the importance of timing, market sentiment, and the psychological aspects of trading. Group 1: Historical Market Crashes - The article references the 1929 market crash, where Joseph P. Kennedy sold all his stocks and only held a long position in a Cuban sugar company, indicating a strategic exit from the market when sentiment was overly bullish [6][8]. - Jesse Livermore, known as the "King of Speculation," made significant profits by shorting the market before the 1929 crash, earning $1 billion (equivalent to $20 billion today) [11][12]. - The 1987 crash is highlighted with the story of Mark Cook, who turned a $30,000 investment into $11 million by holding deep out-of-the-money puts on the S&P 500 [15][17]. Group 2: Investor Strategies and Lessons - Bill Lawton, CEO of Westgate Global Group, profited from the 1987 crash by betting on volatility, emphasizing that calmness is crucial during crises [33][34]. - John Paulson made a significant profit during the 2008 financial crisis by purchasing credit default swaps (CDS) against subprime mortgages, earning $10 billion from a $22 million investment [50][52]. - The article mentions the importance of being contrarian, as seen in the actions of various investors who thrived during market downturns by maintaining a clear strategy and not succumbing to panic [12][34][50]. Group 3: Current Market Indicators - The article notes that the cost of options to protect against a significant market downturn has risen to 46 basis points, the highest level since the sell-off in April [66]. - It suggests that investors are increasingly willing to pay for insurance against a potential 55% drop in the S&P 500 over the next five years, indicating heightened market anxiety [66][69].

Core Viewpoint - The article emphasizes the importance of asset hedging, particularly through the use of deep out-of-the-money put options, to protect against market downturns and "black swan" events, which are often underestimated by investors [1][2][4]. Group 1: Importance of Hedging - Historical examples illustrate that during significant market downturns, such as the 2008 financial crisis, hedging strategies can yield substantial returns, as demonstrated by Universa Investments achieving approximately 115% returns while the S&P 500 fell by about 37% [1][2]. - Many investors maintain a purely long position without any hedging, often due to a fear of underperforming compared to peers, leading to a lack of protection against potential market crashes [1][2]. Group 2: Mathematical Illustration of Hedging - A hypothetical scenario shows that an investor with a long-only position (Old Wang) could see their investment drop from 1.52 million to 0.988 million after a 35% market decline, while a hedged investor (Old Li) would still retain a value of 1.336 million due to the gains from put options [3][4]. - The article highlights that deep out-of-the-money put options can potentially multiply returns significantly during market crashes, reinforcing the necessity of hedging [4]. Group 3: Strategies for Hedging - The article discusses the use of long put options as a dual-purpose tool for both speculation and hedging, with protective puts being a strategy to mitigate losses in a bear market [5][9]. - It provides a step-by-step guide for investors on how to implement these strategies effectively, including determining risk tolerance and selecting appropriate strike prices and expiration dates for options [11][12]. Group 4: Practical Applications - Two practical applications are presented: one for speculative purposes and another for hedging against potential market downturns. For speculation, the article suggests selecting a strike price close to the current stock price, while for hedging, it recommends choosing a deeper out-of-the-money strike price to minimize costs [13][16]. - The article also outlines the potential outcomes of these strategies, including scenarios where the stock price falls below the strike price, demonstrating how hedging can limit losses [17][18].