Nassim Taleb: Ask Me Anything

[lawrence-lugar]

My question to all you professional option traders is whether what he said has merit

This way an amateur mom and pop retail trader like me can learn something

Cheers

Everything is based on your ability to call, or predict, direction,
And the more extreme, or volatile, or unexpected a move happens...the more rewarding it can be,

Otherwise, all those formulas are just about leaving things to total random lotto chance,
And you know how ambiguous that can be -- and not necessarily play out in your favor,

The market is not like a blackjack deck shoot...where you can kind of count cards; it's a complete space gamble each day,
You can run simulations in light years...and never trigger whatever perfect storm scenario you're banking on,

Things have to happen relatively now -- because that's what trading is. Happen as soon as possible/today/intraday, and repeat...to buildup your nuclear bomb compounded returns,

Theories and expectations are kind of meaningless in the real trading world; to succeed here...you need to be pro-active and have skill,
The market and time waits for no one, (to be right, or have all their ducks lined up)

 

[ironchef]

Everything is based on your ability to call, or predict, direction,

Otherwise, all those formulas are just about leaving things to total random lotto chance,
And you know how ambiguous that can be -- and not necessarily play out in your favor,

The market is not like a blackjack deck shoot...where you can kind of count cards; it's a complete space gamble each day,

You made an excellent point. My profitable trades all came from correct directional calls.

Another way to state it is: One can profit from tails if one knows when the tails are coming. Easier say than done.

Regards,

 

[newwurldmn]

Q

A Wall Street hedging expert said that adding such a bearish bet to a big holding of stocks could erase as much as 8 percent from the value of the portfolio each year.

Mr. Spitznagel, however, contends that Universa’s hedge costs far less than that. Universa, he said, has been able to buy protection against a stock market crash at a price that makes the firm’s overall strategy viable. But doing so has not been easy, Mr. Spitznagel contended. “You’ve got to be buying when other people are selling it — and that’s very hard to do,” he said.
UQ

As an adviser, Taleb would have to tell the public very little about anything that could be useful, if any. imo

This is their real edge. They can buy tails cheaper than others.

However it should be noted that their publicly stated returns (in news articles and press releases) don't make any sense. Often funds will play with the numerator (by cherry picking the period or segregating a strategy). These guys also play with the denominator. So i would say it's unclear how much they earn or even how much they manage.

 

[srinir]

Pekelo,


1. Keep most of your assets risk free but use a very small percentage to invest in tail events.

2. The investment in tail events can be profitable because of the convexity of tail events.



My question to all you professional option traders is whether what he said has merit? Yes/no? And what are your rationale, or proofs of your answer. This way an amateur mom and pop retail trader like me can learn something from you professionals.

Cheers.

1. Do you have this right? I believe his theme is 90% in risk free and 10% in risky portfolio. If one is in already 90% risk-free assets, there is no need to invest in tail events.

2. Yes. It can be profitable. There is no need to wait for tail events to make money from hedge. All it needs to happen is repricing of risk. Think of this way, if odds from sports book at the beginning of tournament is 1:100. If the team wins first game, then odds are repriced to 1:50 or 1:75. In this case bet already made double the money.

 

[ironchef]

1. Do you have this right? I believe his theme is 90% in risk free and 10% in risky portfolio. If one is in already 90% risk-free assets, there is no need to invest in tail events.

2. Yes. It can be profitable. There is no need to wait for tail events to make money from hedge. All it needs to happen is repricing of risk. Think of this way, if odds from sports book at the beginning of tournament is 1:100. If the team wins first game, then odds are repriced to 1:50 or 1:75. In this case bet already made double the money.

1. He proposed investing xx% in risk free bonds and (1-xx)% in tail events that lose a little at a time but can pay big when tails hit due to "convexity"?

2. Very interesting comments and very profound. I need to think about this carefully.

Thank you. I learn something from you.

 

[ironchef]

This is their real edge. They can buy tails cheaper than others.

How can a a retail person do that?

 

[srinir]

1. He proposed investing xx% in risk free bonds and (1-xx)% in tail events that lose a little at a time but can pay big when tails hit due to "convexity"?

This still does not seem right. Risk free bonds itself is a insurance and buying tail hedge insurance (which has a negative expected return) on a insurance itself can wipe out any portfolio returns even with a convex tail return.

Anyway i looked up Mark Spitznagel presentation. He is talking about 90% equity and 10% in safe heaven trades (3% tail hedge in his presentation)

This is more like it. One needs insurance if that trader is leveraged or high % of portfolio in high beta.

It can be other way also 90% risk free and rest high beta stocks or calls on index (+ve tail) etc.

 

[ironchef]

It can be other way also 90% risk free and rest high beta stocks or calls on index (+ve tail) etc.

+1. This is the type of discussion I appreciate. Make sense.

But can returns have high probability of profits?

Regards,

 

[srinir]

^^
That depends on probability of profit on 10% of their portfolio.

CPPI (Constant Protection Portfolio Insurance) follows the same principle. This is mostly used in retirement planning. Here retire protects safe income stream and invests rest on risky portfolio. I don't see any reason not to be useful in trading portfolio also.

I do have some paper's which back tested this strategy. But it is dated, SPX has gangbuster return after this paper. I will look for it probably and post tomorrow.

 

[Martinghoul]

My question to all you professional option traders is whether what he said has merit? Yes/no? And what are your rationale, or proofs of your answer. This way an amateur mom and pop retail trader like me can learn something from you professionals.

Cheers.

No, all of NNT's more recent quasi-philosophical stuff doesn't have merit...

I would say that what he used to write a long time ago, when he had some integrity, was worthwhile.