Nasem Taleb of 'Black Swan' Fame Will Be On The Colbert Report Tonight @ 11:30 PM

Quote from Pa(b)st Prime:

A "Black Swan" can be either a totally unanticipated event or an expected event in which risk is under priced.

I'll give you examples.

We all know that options premium works in similar fashion to insurance premium. It's no accident that we hear interchangeable jargon like the word premium itself or the phrase portfolio insurance. Same animal. Deferred OTM strikes represent differing levels of deductibility.

So let's pretend that earthquake insurance is exchange listed (someday it will be). We can assume on the ET Earthquake Exchange that different locales will trade at different prices. We know it will cost more to buy the Los Angeles or Bay Area policy than the Omaha policy. Logical eh?

So how do markets price in the real world?

If L.A. were to have a Northridge quake we'd see uninsured home owners (option buyers) bid up for policies while nervous insurers (premium writers) demand top dollar for coverage. Think of the VIX after 9/11.

Then after several years of no quakes observe how the market dynamic changes. Insurers are banking windfall profits and homeowners become WAY less apprehensive about being uninsured. Suddenly premium buyers think "I should just self insure, I'm pissing away this premium each year" and insurance companies who'd never operated in SoCal think, "we should enter this market and undercut these high premium insurers." Now think VIX, 2007.

The intrinsic risk of an L.A. earthquake hasn't changed at all yet premium prices have fluctuated wildly.

Now here's the Black Swan. Our Omaha contract trades at a very low premo. There's never been a quake there so to a premium writer it's a virtual sure bet to collect even a scant $79 a year on each policy (contract). Out of no where though a 7.2 hits the Missouri River and thousands of homes are destroyed. Unimaginable to the market place.

At the same time a 7.0 hits L.A. Totally imaginable and anticipated to participants but even still it was a Black Swan because the risk was mispriced.
More...

Determining whether FAR out-of-the-money options...
Have been mispriced the last 20 years...
Is TRIVIAL.

I could do it in one weekend...
But so could every serious option trading operation in the world...
So it pointless.

Taleb could provide the numbers...
In 1% of the time it took to write his book...
But CHOOSES not to.

The FAR more interesting question is:

Has market volatility...
Undergone a ** paradigm shift ** due to technology...
And will now be at a permanently lower level...
Or are we just in a routine 3-4 year period of comatose markets?
 
Quote from stock_trad3r:

Nasem Taleb aka 'captain obvious' is getting a lot of media attention from his book
More...

I am not Nasem Taleb.:D But I do find "Black Swans" swimming in the OTCBB cesspool every now and then.
 
Quote from Pa(b)st Prime:

A "Black Swan" can be either a totally unanticipated event or an expected event in which risk is under priced.

I'll give you examples.

We all know that options premium works in similar fashion to insurance premium. It's no accident that we hear interchangeable jargon like the word premium itself or the phrase portfolio insurance. Same animal. Deferred OTM strikes represent differing levels of deductibility.

So let's pretend that earthquake insurance is exchange listed (someday it will be). We can assume on the ET Earthquake Exchange that different locales will trade at different prices. We know it will cost more to buy the Los Angeles or Bay Area policy than the Omaha policy. Logical eh?

So how do markets price in the real world?

If L.A. were to have a Northridge quake we'd see uninsured home owners (option buyers) bid up for policies while nervous insurers (premium writers) demand top dollar for coverage. Think of the VIX after 9/11.

Then after several years of no quakes observe how the market dynamic changes. Insurers are banking windfall profits and homeowners become WAY less apprehensive about being uninsured. Suddenly premium buyers think "I should just self insure, I'm pissing away this premium each year" and insurance companies who'd never operated in SoCal think, "we should enter this market and undercut these high premium insurers." Now think VIX, 2007.

The intrinsic risk of an L.A. earthquake hasn't changed at all yet premium prices have fluctuated wildly.

Now here's the Black Swan. Our Omaha contract trades at a very low premo. There's never been a quake there so to a premium writer it's a virtual sure bet to collect even a scant $79 a year on each policy (contract). Out of no where though a 7.2 hits the Missouri River and thousands of homes are destroyed. Unimaginable to the market place.

At the same time a 7.0 hits L.A. Totally imaginable and anticipated to participants but even still it was a Black Swan because the risk was mispriced.
More...

an event which is very unlikely to happen will not be mis priced because there is nobody on the other side of the trade.
this is similar to bookie operations where if odds are astronomical the bookie will not take the other side.
eg. prince harry in the UK was supposed to become engaged. everybody was so certain that they would become engaged nobody would give odds the couple would break up.


bookies understand black swan:)
 
Quote from QuantPlus:


The FAR more interesting question is:

Has market volatility...
Undergone a ** paradigm shift ** due to technology...
And will now be at a permanently lower level...
Or are we just in a routine 3-4 year period of comatose markets?
More...

no and yes........technology merely amplifies, a facility to express........people don't change, the market makers don't change.........markets don't change.........any sense of a new order via a paradigm shift is like saying markets will always go up (immediately or otherwise) .......think the pristine Japanese market of 1989 when the new paradigm shift was in full swing........erm, fall swing.........

:cool:
 
Quote from zdreg:

an event which is very unlikely to happen will not be mis priced because there is nobody on the other side of the trade.
this is similar to bookie operations where if odds are astronomical the bookie will not take the other side.
eg. prince harry in the UK was supposed to become engaged. everybody was so certain that they would become engaged nobody would give odds the couple would break up.


bookies understand black swan:)
More...

That's why an auction market will always be tighter than a dealer market.

Compare Tradesports to a bookie. Here's a funny aside. TS had Curlin the week before the Derby at around 18-20 cents while the Vegas line was roughly 3-1. Where did Curlin go off Saturday? At 5-1. The pricing prowess of auction markets at work.
 
Quote from Pa(b)st Prime:

That's why an auction market will always be tighter than a dealer market.

Compare Tradesports to a bookie. Here's a funny aside. TS had Curlin the week before the Derby at around 18-20 cents while the Vegas line was roughly 3-1. Where did Curlin go off Saturday? At 5-1. The pricing prowess of auction markets at work.
More...

TS and LV are auction markets. $10k in action can move an NCAA game from hook to even.
 
Quote from zdreg:

an event which is very unlikely to happen will not be mis priced because there is nobody on the other side of the trade.
this is similar to bookie operations where if odds are astronomical the bookie will not take the other side.
eg. prince harry in the UK was supposed to become engaged. everybody was so certain that they would become engaged nobody would give odds the couple would break up.


bookies understand black swan:)
More...

Excellent post.

I used to be a pro sports bettor in Las Vegas...
And sports betting lines are FAR more efficient...
Then pricing on the NYSE.

Sports bettors/bookies and poker players...
Understand their Zero Sum Game mathematics...
Waaaay better than the "traders" represented here.

And the kind of trades that Taleb is promoting...
Buying options on 3 or 4 or 5 SD events...
Pretty much could not be done on public markets...
And could, THEORETICALLY, only be done in private bets.

And the idea that you could get such options "cheap" is crazy.

It's the opposite...
Such long shots are typically very expensive.

To use a simple example...
A waaaay out-of-the-money option that has a fair value of $0.01...
Would probably cost you at least $0.10 or ten times fair value...
Even if you could get someone to write a sizable amount.
 
I don't have the past data to enable an argument but Quantplus is probably making the following points in regards to technology.

(hopefully Riskarb can pop in here) IV in the pre on-line trading days was at a significant premium to historical vol. Do to lower commissions the opportunity to sell options was almost exclusively in the domain of MM's. Now anyone can sell premium at the stroke of a mouse for 50 cents a contract.

Also hedging a short gamma position is cheaper and more efficient these days.

Thus technology and commissions have legitimately caused IV's to converge with historical expectations.

Don't confuse the static state of the human condition to the variables presented by technology.
 
Quote from atticus:

TS and LV are auction markets. $10k in action can move an NCAA game from hook to even.
More...

I didn't say they were more liquid than Vegas. Just tighter.:)

BTW: If you want to see tight AND deep, look at Gore on TS.

And as you know Horse Racing as a pari-mutual has always been an auction market.
 
You must log in or register to reply here.
Back
Top