Lets talk variance

.sigma said:
hey man thanks for this, I don’t think I’ve ever read this piece by taleb and I’ve read a lot of his shit.

also, you’ve said a few times about “clipping” the left tail off. Please explain what you mean by this and how can one do this?
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What I mean by clipping the left tail is...removing the risk of ruin from your portfolio

whether that’s hedging a long equities w/ put option against a collapse in the portfolio

whether that’s being 80% in cash/safe numeraire security and 20% in speculative assets, thus capping your loss at 20%

Any structure that is robust or antifragile (2 diff things) against a left tail event.

limit downside risk. define downside risk.

Silly example:

imagine your portfolio entirely consists of owning a short position in Tesla. Someone comes in and buys Tesla overnight and now you’re negative -120%. That’s ruinous.

imagine you have a short on tesla, but have a hedge against a left tail event via options, or some other mechanism. Now you’ve defined your downside risk. (Some use a stoploss, but IMO, a stop loss isn’t really an effective method to strictly define risk). Options do the trick in this case. Or short via options versus the underlying and define your risk with another option against the short option.

In the end, I just mean removing risk of ruin. Whether the risk of ruin comes from a right tail event of the underlying (assuming you’re short a stock and a buyout occurs or something else). Or a left tail event if you’re long the underlying.

Or think of it this way, a left tail event to your Payoff Space, is any event that is disastrous to your P/L. You want to hedge this risk and chop/clip/cut it off and perhaps go so far as actually positioning yourself to benefit from a tail event via being long volatility
 
@.sigma,

My apology I hijack this thread but I do have some relevant questions for @Amahrix, @Same Lazy Element, @TheBigShort & @taowave:

Hedging, spreads, butterfly... variance swap (whatever that is??) are all tail clippers??? o_O

However, there is no free lunch. I found hedging my positions with puts, collars, options with spreads, etc. didn't work well. So now I keep the tails. I am not completely reckless because I do practice Kelly.

The result is I incurred huge losses this year but I also enjoyed years of above average returns from keeping the tails. Am I crazy?

Appreciate any comments/coaching you are willing to give.

Thanks.
 
ironchef said:
@.sigma,

My apology I hijack this thread but I do have some relevant questions for @Amahrix, @Same Lazy Element, @TheBigShort & @taowave:

Hedging, spreads, butterfly... variance swap (whatever that is??) are all tail clippers??? o_O

However, there is no free lunch. I found hedging my positions with puts, collars, options with spreads, etc. didn't work well. So now I keep the tails. I am not completely reckless because I do practice Kelly.

The result is I incurred huge losses this year but I also enjoyed years of above average returns from keeping the tails. Am I crazy?

Appreciate any comments/coaching you are willing to give.

Thanks.
More...


1. Not necessarily, depends what you mean. If I have $100,000 and all are deployed in, say, butterfly spreads, all cash deployed at the same time...i can go bust in a market crash because everything correlates and falls down simultaneously. This is no hedge.....well, The Short options in a butterfly are hedged with the long options, but on a portfolio level you may not be hedged as is the case in the example I just presented. You still busted.

2. You buy a car and you buy car insurance with it. If the car insurance is too expensive, do you buy the car? If you’re mentally sane, no. Let me refer you to this video. Please watch for your benefit https://www.bloomberg.com/news/videos/2016-05-12/nassim-taleb-on-the-importance-of-probability
 
ironchef said:
The result is I incurred huge losses this year but I also enjoyed years of above average returns from keeping the tails. Am I crazy?
More...
Looking back, would you rather give up some of those returns to avoid large losses such as today’s? Would that have been worth it to you, in hindsight? I think now you have your answer.
 
ironchef said:
@.sigma,

My apology I hijack this thread but I do have some relevant questions for @Amahrix, @Same Lazy Element, @TheBigShort & @taowave:

Hedging, spreads, butterfly... variance swap (whatever that is??) are all tail clippers??? o_O

However, there is no free lunch. I found hedging my positions with puts, collars, options with spreads, etc. didn't work well. So now I keep the tails. I am not completely reckless because I do practice Kelly.

The result is I incurred huge losses this year but I also enjoyed years of above average returns from keeping the tails. Am I crazy?

Appreciate any comments/coaching you are willing to give.

Thanks.
More...

Dude your not hi jacking anything.. if anything take over the cockpit! I'll be co-pilot I don't mind! lol
 
Amahrix said:
What I mean by clipping the left tail is...removing the risk of ruin from your portfolio

Or think of it this way, a left tail event to your Payoff Space, is any event that is disastrous to your P/L. You want to hedge this risk and chop/clip/cut it off and perhaps go so far as actually positioning yourself to benefit from a tail event via being long volatility
More...


Why would it be the left tail though? Why not the right?

For example commodities or vol product space can have the skew to the upside (right tail)?

It seems you may be speaking of several different payoff profiles? (P/L of portfolio, distributions of certain asset classes?)

Thanks for the responses!
 
Amahrix said:
1. Not necessarily, depends what you mean. If I have $100,000 and all are deployed in, say, butterfly spreads, all cash deployed at the same time...i can go bust in a market crash because everything correlates and falls down simultaneously.
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This is false. If you had your capital entirely in flies you would not go "bust" in a crash. Although this is hypothetical, just look at the risk/reward of the fly... you assuming this 100k is allocated to ATM flies, all at once, all in. This would never occur, but lets just say it does.. I'm sure the investor would also position other flies (double butterflies) throughout the strike-space below the market to hedge his losses in case the market crashes. So if a market crash did occur, you never know... the crash could pin your hedged fly exactly and you'll end up net net break-even or even ahead. This is pure theoretical shit tho.. But I get what you're trying to convey, i think lol
 
.sigma said:
This is false. If you had your capital entirely in flies you would not go "bust" in a crash. Although this is hypothetical, just look at the risk/reward of the fly... you assuming this 100k is allocated to ATM flies, all at once, all in. This would never occur, but lets just say it does.. I'm sure the investor would also position other flies (double butterflies) throughout the strike-space below the market to hedge his losses in case the market crashes. So if a market crash did occur, you never know... the crash could pin your hedged fly exactly and you'll end up net net break-even or even ahead. This is pure theoretical shit tho.. But I get what you're trying to convey, i think lol
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an underlying can fall to a price that isn't listed as a strike price on the option chain for the expiration you're trading on. Therefore you couldn't have placed a butterfly spread there for the price to potentially pin. An example..AAPL stops offering strike below 105 for front-week. If it collapsed to $90...?

in conclusion, by definition, you still run the risk of it not pinning and going bust (in this ridiculous hypothetical)
 
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