⚠️ Read this before acting on any of the above
This is a teaching model, not a forecast. It uses fixed scenario returns you
choose, not simulated market data, so it cannot tell you what will happen — only how the two
structures behave given assumptions you supply.
- Crash frequency drives the result more than anything else. With one
−35% crash per decade the barbell looks good at almost any payoff multiple; with none,
it loses badly. Predicting how often crashes occur is precisely the thing nobody can do
reliably — so treat a favourable result here as a statement about your assumption, not
about the strategy.
- The convex payoff multiple is the least reliable input. Real option
payoffs depend on strike, expiry, implied volatility at purchase, and how fast the crash
unfolds. A 20× outcome is possible and far from guaranteed.
- The barbell is not a retirement core. It is designed to survive extreme
events, not to fund thirty years of withdrawals. For most retirees a low-cost broad index
core with a bond allocation matched to age achieves the same downside protection with no
option knowledge, no recurring premium, and no roll risk — see
Three Strategies of Huang Shigong Ch. 5 in Classic Books, which works this
arithmetic out.
- Premium spend is certain; the payoff is not. At 1% a year, a decade of
hedging costs roughly 10% of the portfolio and requires crashes frequent and severe
enough to compensate. History does not reliably supply them.
- Taxes and execution are ignored here. Rolling options in a taxable
account generates short-term gains and losses that this model does not capture.