Derivatives Strategy

18 August 2026, 15:03 UTC Chief Investment Office GWM Investment Research

(Delta-)hedging your hedges Derivatives Strategy Authors: Luca Henzen, Analyst, UBS Switzerland AG; Moritz Vontobel, Analyst, UBS Switzerland AG

• Timing market corrections is notoriously difficult. Systematic and cost-efficient protection can help investors avoid adding hedges only after risks have become evident, and hedging costs have already risen, but its effectiveness should be reviewed regularly as market conditions evolve.

• Delta-hedging long put positions can improve the efficiency of option-based hedges by monetizing volatility spikes during periods of market stress, while reducing the carry burden associated with traditional protective puts.

• The strategy is particularly effective against sharp equity drawdowns accompanied by volatility spikes Source: Shutterstock and should be viewed as one component of a broader diversified protection toolkit alongside other hedging approaches targeting milder or more gradual market corrections.

In "Wish You Were Here," Pink Floyd asks whether we key question is therefore not whether protection is valuable, can truly distinguish heaven from hell, blue skies from but how to implement it more efficiently. In this report, pain. Investors face a similar challenge. Just as it is difficult we discuss ways to reduce the cost of defensive option to tell when blue skies may be giving way to darker strategies while improving their monetization during periods weather, identifying market tops and bottoms in real time of market stress, thereby enhancing the overall cost-benefit is notoriously difficult. Risks often appear most benign near profile of portfolio protection. market peaks, while fear tends to be greatest near market troughs. As a result, investors frequently seek protection Timing the market and protection is a difficult exercise only after a correction has begun. The challenge is not In our report “Time to rethink portfolio hedges” from necessarily that protection is added after the initial market 9 June 2026, we explained how sudden volatility shocks decline, but that it is often purchased when demand for in financial markets can still happen. Although investors hedges has already increased and protection has become have benefited from a favorable market environment that significantly more expensive. The value of portfolio hedges supported risk assets over the past four years, risk-off therefore lies not in perfectly timing market peaks, but in events like “Liberation Day” in April 2025 and the recent having a disciplined framework that allows protection to be energy crisis following the Middle East military escalation put in place before volatility reaches stressed levels. between the US and Iran have reminded investors that equity downside can still happen and that timing it remains The challenge, of course, is that hedges often are not a very difficult exercise. free, in particular if options-based. Maintaining downside protection over time carries a cost, which can weigh on We maintain a constructive view on equities, supported by portfolio returns when markets continue to advance. The strong earnings growth, continued AI-related investment,

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

and a resilient global economic backdrop. However, risks corrections may not deliver similar results in future sell-offs. remain, including a potential loss of confidence in the Investors therefore face the challenge of improving option AI growth story, weaker-than-expected performance from strategy performance without overfitting, whether through the broader economy, and higher financing costs driven excessive model complexity or by calibrating parameters too by persistent inflation or elevated interest rates. To help closely to past market episodes. mitigate these risks, we favor a well-diversified portfolio across regions, sectors and styles, complemented by quality Figure 1 - Long put strategies face significant carry bonds, broader commodity exposure, and also capital headwinds… preservation strategies such as defensive equity…