Lessons from 2001

The last time there was this big a market rout, I learnt a few lessons.

• Vol is really expensive. Sell it around the money. But the wings are dangerous. I like being short vega in this kind of environment, but to get longer on big market falls or rallies.
  
• Whipsaws happen. Live with it and plan your rehedge frequency accordingly: failing to capture the whipsaw if you are long gamma loses you a lot of potential upside. Look at your 1%, 2.5%, 5% and 10% deltas, not just the instantaneous one.
  
• Gamma holes can kill you at any strike within 30% of the money. Fill them as cheaply as you can.
  
• Correlation structures break down completely in environments like this one. Be especially careful of assumptions about cross gamma or strategies like dispersion trading that rely on stable correlations.

And if that doesn't work, pull up the drawbridge.