Nassim Taleb makes the rounds again

[Brandonf]

Quote from riskarb:

Whatever Man. He states in the BusinessWeek interview that his lotto wins occurred in 1987 and Nasdaq in 2000.

He mentions buying flies, strangles and puts. Why would he be buying puts in FI and FX? If he's buying natural flies then he's net-short gamma. The same can be said if he's selling xmas trees[your theory]. If he's netting to either position he's certifiably insane.

Dont you think that given the fact that he won the lotto twice there could be something to his number picking method?

 

[smilingsynic]

Quote from energytraderus:


That option market makers might not be able to accurately price in extraordinary events is banal; evidently Taleb doesn't know that MMs have priced OTM options with "fat tails" ever since options traded; but, one shouldn't expect an ivory tower academic who can't trade to know this.

Certainly MM price in the risk of "fat tails", but there is no way of knowing in advance if they're getting PROPERLY compensated for the risk for one simple reason: no one knows for sure what is going to happen in the future.

It is impossible to precisely "game" the future. That is the premise underlying the buying of deep otm options, and it is an unfalsifiable premise.

 

[Pekelo]

Quote from Brandonf:

Dont you think that given the fact that he won the lotto twice there could be something to his number picking method?

The question is: How many times did he have to buy tickets to win twice?

Also:

Is he ahead in the long run or in the red??? My guess is that in the long run he couldn't outperform the S&P using the mentioned strategy....

 

[mysticman]

Quote from Pekelo:The question is: How many times did he have to buy tickets to win twice?

His reply would be that he only needs to win once. What Taleb claims is that when he was holding 20 sigma OTM options he could sustain 67,000 months of time decay. "And you don't need to be right on the event, because you can bleed for 67,000 months and still be ahead." Incredible claim, and he might be right, but don't go looking for 20 sigma options or even 10 sigma options on Apple. Taleb is dealing with the interbank currency markets -- a far different order of depth and liquidity than what most of us are familiar with.
These debates on buying or selling far OTM options are probably academic. Still, Taleb's critique on the bell curve distribution ("The bell curve is a fraud") interests me. Whatever your take on the peculiar psychological perspective of Taleb, he is really following Mandelbrot who was/is far in advance of Taleb in the sense that he has been studying the behavior of financial markets longer than many here have been alive. If Mandelbrot's Power Law distributions are being used almost everywhere except finance, it may be a sign that the B/S Gaussian assumptions have become institutionalized, and we have to ask "Why?". It may mean that with respect to tail volatility, we indeed are being "fooled by randomness".