Nassim Taleb and Empirica

[riskarb]

Quote from Pabst:

The success of a strat like Taleb's hinges on diversifying over as many asset classes as capital (or liquidity) allows. Something in the world is always moving. Whether those black swans offset the pigeons is of course disputable. But catching an autumn of 2003 move in Soybeans, Live Cattle, or Cotton move offsets a lot of worthless expirations.

I've heard Taleb only trades equity options. I can elaborate, but not on a public forum.

arb.

 

[riskarb]

Quote from sle:



Well, i have done it as a part of a contigent asset spread - go short on OTM reciever swaptions and long on OTM treasury puts. I have also seen OTM Tbill vs OTM Tbond options plays as an attempt to capture the curve slope changes. But i do agree that as a stand-alone strategy it is a waste of time.

Agreed, but I don't think he's trading a pairs-strategy. I've nothing against the strategy per se, especially if you're talking a 3comma portfolio, but I'd hate the see the equity curve.

arb.

 

[riskarb]

Quote from SleepingGiant:



3) If you had to choose one, would you rather be short the tails (Niederhoffer) or long the tails (Taleb)?


-SG

Vic has(had?) a nicer house/car/etc...

arb.
<sell the tails!>

 

[Specul8r]

Quote from riskarb:



Vic has(had?) a nicer house/car/etc...

arb.
<sell the tails!>

LOL

 

[jem]

Well which stocks would you pick. nanotechnolgy, hydrogen batteries. Short targets like homebuilders, nuclear reactor owners, insurance companies.

I think it would be fun (morbid) to pick your targets and then determine the best way to put the positions on.

 

[murray t turtle]

Quote from SleepingGiant:

I wanted to start a discussion on Nassim Taleb's Empirica (his hedge fund) and, more importantly, his trading strategy. My understanding is that he has taken the opposite approach of Victor Niederhoffer. That is, instead of selling OTM premium, he is buying it. It seems that he believes that most traders underestimate the probability of a large adverse move and, in the long run, it is better to be "long the tails", rather than short.

Empirica's strategy seems to be contrarian in nature and that's one reason that I find it to be interesting (though I'm not sure if it can be profitable over the long run). It seems that Empirica is willing to take many small loses while waiting for a big move, a "home run", that will not only cover their previous losses but provide additional gains as well. If this is the case, Empirica will never "blow up" in the sense that one drastic event won't take them out (unless I'm missing something). The worse thing that could happen is that they will simply "bleed to death" over a long period of time.

So, a few questions for the group...[and answers in brackets murray t turtle writes] -----------------------------

1) Do you think Nassim Taleb is right in that traders underestimate the probability of a drastic move in the underlying product?

[Yes Nissim is right & buying homeowners insurance is a good idea for some if it never pays off;
however one may want to pay attention to Newsweek-November 10th Cover named ''God & Health ''.

2) Can a strategy like this work over the long run?

[Higher probability yes &
not saying you should overweight .50 index puts in a proven, called bull market.


3) If you had to choose one, would you rather be short the tails (Victor Niederhoffer) or long the tails ( Nissim Nickolas Taleb)?

[ I respectfully wish Nissim Nickolas would meditate on Victors quote ''one red robin doesnt make a spring''

Interesting Mark Cook moved from big selling options
to selected buying stock option indexes & double diget stock %, same fund.

Dont know if Mark Cook likes some stock dividends;
i do.]



-SG

:

 

[StillTrading]

Quote from murray t turtle:
[ I respectfully wish nissim Nickolas would meditate on Victors quote ''one red robin doesn't make a spring''

:

I agree that Nassim is overly pessimistic at times and does miss out on many profitable situations. But if Victor Neiderhoffer understood the "No Black Swan's" problem then he wouldn't have blown up. So I guess I'm long the tails

 

[ktm]

Black Swans had nothing to do with VN blowing up.

 

[StillTrading]

Really, correct me if Im wrong but New Yorker ran an article sometime back saying 'Just a year later, L.T.C.M. sold an extraordinary number of options, because its computer models told it that the markets ought to be calming down. And what happened? The Russian government defaulted on its bonds; the markets went crazy; and in a matter of weeks L.T.C.M. was finished.'. VN, led by empiricism wrongly judged the rarity of the event. He never saw the defaulting of the Russian Bonds because it never occured in the past. Inho, this is def. a black swan issue.

 

[easyguru]

Quote from StillTrading:

Really, correct me if Im wrong but New Yorker ran an article sometime back saying 'Just a year later, L.T.C.M. sold an extraordinary number of options, because its computer models told it that the markets ought to be calming down. And what happened? The Russian government defaulted on its bonds; the markets went crazy; and in a matter of weeks L.T.C.M. was finished.'. VN, led by empiricism wrongly judged the rarity of the event. He never saw the defaulting of the Russian Bonds because it never occured in the past. Inho, this is def. a black swan issue.

I think VN loss was in Thai baht trade.

But don’t pure short-selling strategies always end badly, like The Art of Speculation author Victor Niederhoffer’s famous 1997 blowup? Not at all, says Ansbacher.

“From what I understand of that situation, the difference between me and Victor Niederhoffer is pretty simple,” he announces. “In 1997, Niederhoffer had already lost half of his money betting on the Thai baht. All the clients that could leave him already had. But Niederhoffer had other clients under a lock-up agreement where they could only leave his fund at year-end. He needed to make back a great deal of money in a short period of time or risk the rest of his clients fleeing. Selling S&P put options was effectively a double or nothing way to try to make himself whole by year-end. He knew exactly what he was doing, and he just kept selling more options on the way down because he knew the game was effectively over anyway, unless the market came roaring back.” It did, of course, but a tad too late for old Vic.
http://ansbacherusa.com/der.html