Thank you. I think I understand what you are saying.Assuming fat tailed/heavy tail distribution, generally speaking, it can. Depends what we’re looking at. And What we define as black swan etc. sometimes a black swan event is when everyone is predicting a tail event to happen and pricing it as if it will, and none does.
I’d like to add a side point just for sake of spreading more knowledge with respect to black swans. Black swan is subjective, not objective
A turkey slaughtered on thanksgiving; it’s a black swan event to the turkey... but not a black swan event to the butcher
The turkey can look at its past data and assume tomorrow will be no different than the last 1,000 until alas, it’s on a thanksgiving dinner table
Edit: fun fact: not every tail event is a black swan event. COVID19 is not a black swan event. We knew and have known that epidemics have happened and can happen again. Therefore, it’s not something to be deemed a black swan. It certainly is a tail event.
Edit2: If you have a payoff space, and you cut the left tail off via defining your risk. You can expose yourself only to “positive” blank swans. So you benefit from such events. In this case, if we look at the underlying (let’s call it “x”), it can exhibit heavy tailed properties (left and right) but in our payoff space, via defining our risk, we can eliminate the downside effect of a tail event or black swan event by capping losses and taking it a step further by being long vol so we actually benefit from such surprises
Lets talk variance
- Thread starter .sigma
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If you look at the histogram of daily SPY change (1980-2005), it shows "fat tails" on both side:
Are both tails tradable was my question.
Taleb in his writing implied he took advantage of the left tails. I modeled SPY histograms from 1993-2019, the left tails are a lot more pronounced than the right, thus my question.
I don't know how to tie this to vol and variance because I only think in price space.
iron, not only do you see fat tails..
the MAJORITY of the markets down moves are from the left tail, and vice versa for the right tail.
pretty crazy when you think about that.
we just need to acknowledge that there are things unknowable and hedge ourselves (clip the left tail off); can be done a few ways
1. Both tradable
2. Because of the skew
3. Let’s focus on our payoff space and simply make that, at the least, robust to tail events(surviving) or take it one step further and become antifragile to tail events (thus surviving and gaining from the event itself).
people spend a lot of time on x versus f(x)
https://www.elitetrader.com/et/threads/the-fallacy-of-forecasting.336260/
. I always wonder why someone like you, @Same Lazy Element, @Kevin Schmit, @taowave... spend time on ET helping us retails? But we sincerely thank all of you. The most important concept I learned from @MrScalper.
The most important concept I learned from @MrScalper.
need not draw a line in the sand and put these users you've mentioned above on one side and yourself and retail on the other. we're in this together. all those guys im sure have had large losses like myself and humbling experiences; its the post traumatic growth experience where the knowledge develops, if you allow it to. And one must nourish that process and allow it to happen, but closed-mindedness, stubbornness, ego, and arrogance kills it. We're all just humans, and to be human is to be prone to be fooled by randomness.
plus, idk the distinction between retail and professional. As long as your P/L is positive over time........ that’s the only thing that really matters, isn’t it
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Thanks. Enjoyed reading it.