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Any thoughts on this article?
- Thread starter shneed
- Start date
see. the spin was definitely in favor of 'the next big thing.' It's the 'it's cool to be anti' thing carried to its logical extreme. It's death metal trading.Originally posted by PuffyGums
The article makes it seem like Taleb is immune from fatal losses. As more traders sell volatility, Talebs strategy will earn thinner and thinner profits.
For a great example of how to sell volatility check this out:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=3382&perpage=6&pagenumber=1
The lesson for me was how flexible Tony was in closing the position once the risk/reward shifted.
My point again, is that selling vs. buying volatility is not an appropriate argument. It is similar to other "scientific" arguments such as nature or nurture, etc. Life is way more complicated and simply resists the attempt to box it into neat categories.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=3382&perpage=6&pagenumber=1
The lesson for me was how flexible Tony was in closing the position once the risk/reward shifted.
My point again, is that selling vs. buying volatility is not an appropriate argument. It is similar to other "scientific" arguments such as nature or nurture, etc. Life is way more complicated and simply resists the attempt to box it into neat categories.
I read taleb's book "fooled by randomness" and it is truly a great book, even though Taleb has an ego the size of a mountain ( although he is successfull, talented, etc. )
For me the meaning of the book is that in the market, you cannot ignore something just because it is unlikely, which is counter to common sense. To do so is to play russian roulette. The chance of losing in russian roulette is only 1 in 6, for a six shot revolver. However, the penalty for losing is death. Even though you have a 5 out of 6 chance of winning the game, do play the game is totally foolish. Taleb sees naked option sellers at russian roulette players, and the ones that become famous are just the ones that haven't died.....yet. I think he is probably right.
However, he doesn't talk about spreads at all. With a spread the worst possible outcome is not wipeout unless you put your whole account into it. I would like to know what he thinks about that.
For me the meaning of the book is that in the market, you cannot ignore something just because it is unlikely, which is counter to common sense. To do so is to play russian roulette. The chance of losing in russian roulette is only 1 in 6, for a six shot revolver. However, the penalty for losing is death. Even though you have a 5 out of 6 chance of winning the game, do play the game is totally foolish. Taleb sees naked option sellers at russian roulette players, and the ones that become famous are just the ones that haven't died.....yet. I think he is probably right.
However, he doesn't talk about spreads at all. With a spread the worst possible outcome is not wipeout unless you put your whole account into it. I would like to know what he thinks about that.
Babak,
Good point. The beauty of options is selecting the appropriate strategy for the market you're in.
We really don't know too much about Taleb's actual trading. The article implied his only approach is long OTM vol. I find that a bit hard to believe. If you accept his apparent premise that out of the money premiums are too cheap, what does that say about in the money or at the money's? Wouldn't they be underpriced as well, just not as much?
Good point. The beauty of options is selecting the appropriate strategy for the market you're in.
We really don't know too much about Taleb's actual trading. The article implied his only approach is long OTM vol. I find that a bit hard to believe. If you accept his apparent premise that out of the money premiums are too cheap, what does that say about in the money or at the money's? Wouldn't they be underpriced as well, just not as much?
Originally posted by Babak
A covered call strategy with no stop loss is dangerous. But where (except for gaps) is the risk when you have an exit strategy just in case?
I'm not sure but would lack of liquidity be one other type of risk that is often underevaluated? As I see it there is the illusion of liquidity in stable and liquid markets. As soon as the big 5 sigma event hits then the liquidity that everyone took for granted before evaporates like the dew before the sun. Is there really any way to gauge the actual liquidity in times like these? If you are loaded to the gills with a product that nobody wants to take the other side of then how can you limit your risk?
Isn't part of the way that premium sellers make their money by riding out adverse moves that on the surface appear to be "non-standard distributions" and allowing time premium to erode? In essence the clock bails them out. Premium sellers talk about having "big balls" to stick with trades that might otherwise be big losers. One strategy I have heard about is basically a doubling down methodology. The pockets are deep enough so that they can keep doubling the position until the clock runs out. I suppose the achilles heel of this approach is that when the real 5 sigma event occurs they are at full risk and run out of money.
This is an interesting article because it contrasts two opposing views on the market. On the one hand Niederhoffer concentrates on the many events that are "normal" while Taleb concentrates on the few events that are "abnormal". Statistics tells us that there is less chance of luck when we have a larger sample size. So statistics might lead us to infer that Niederhoffer's results are less likely the result of luck than Taleb's results. And yet these abnormal events happen with such frequency that they can hardly be the result of luck. The other question is how can Taleb convince his investors to stick it out for months of losing results and then a home run?
Originally posted by TriPack
The other question is how can Taleb convince his investors to stick it out for months of losing results and then a home run?
Most lessons in the market come to you through the experience of pain... Learning to withstand long flat periods in an account will only come through reward IMO