Nassim Taleb makes the rounds again

Quote from optioncoach:


If you are short options deep OTM on an index like S&P and the market starts falling, you can short futures (especially for those selling options on futures), roll into butterflies or other similar positions where you lock in a loss much smaller than the max loss. So you take a huge hit but still are alive.
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quote....

.... The exchange's systems were overloaded and if you placed an order to buy or sell a share on that day there could be a delay of up to two hours before your order was executed....

.... at one point the futures price for the December contract was 18% less than the S&P500 Index.
 
I acknowledge those events can occur, even a 9/11 event, but if the investor is wiped out from such a move than the risk management is lacking. I can see someone taking a hit but getting wiped out usually means the entire portfolio was committed to a naked option position.

Quote from gbos:

quote....

.... The exchange's systems were overloaded and if you placed an order to buy or sell a share on that day there could be a delay of up to two hours before your order was executed....

.... at one point the futures price for the December contract was 18% less than the S&P500 Index.
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Can someone explain what sigma refers to in the context of an option? Taleb mentions this in his recent interview with Trader Daily. Specifically, how far out of the money are his options?

Im familiar with gamma, delta, rho, etc.. but sigma doesn't show up in my options book - (by Haug, The Complete Guide To Option Pricing Formulas)

Thanks
 
Quote from psytrade:

Can someone explain what sigma refers to in the context of an option? Taleb mentions this in his recent interview with Trader Daily

Im familiar with gamma, delta, rho, etc.. but sigma doesn't show up in my options book - (by Haug, The Complete Guide To Option Pricing Formulas)

Thanks
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Sigma = Standard Deviation
 
The strike price of the options would be away from the current price by alot.

My interpretation of the strike price for a 20 sigma event call option

sigma = (StDev(Close,10) * 20) + Close;

Ticker Date/Time change sigma Close
^GSPC 2/14/2006 1.1128 1419.41 1275.53
A 2/14/2006 1.28919 44.86 34.8
AA 2/14/2006 1.29631 40.67 31.37
AAPL 2/14/2006 1.94809 131.77 67.64
 
Quote from psytrade:

The strike price of the options would be away from the current price by alot.

My interpretation of the strike price for a 20 sigma event call option

sigma = (StDev(Close,10) * 20) + Close;

Ticker Date/Time change sigma Close
^GSPC 2/14/2006 1.1128 1419.41 1275.53
A 2/14/2006 1.28919 44.86 34.8
AA 2/14/2006 1.29631 40.67 31.37
AAPL 2/14/2006 1.94809 131.77 67.64
More...

The context in which he mentions 10 sigma events is that the occurrence of a 10 sigma move is actually more common then the math would indicate. There really is no accurate way for one to price a 10 sigma option because of this. He was not inferring that he was buying 10 sigma options. I stated that earlier on this thread. You need to understand that when you read Taleb, he is making an academic argument. He is simply questioning the notion of risk management and how effective it is using the current tools in modern finance theory.
 
Oh ok, I thought it was some strategy he had for buying "cheap" out of the money options. I get it, he's just arguing the case for these events, and their reward potential if they happen. Ditto
 
Reality is far more vicious than Russian roulette.....unlike a well-defined precise game like Russian Rolulette, where the risks are visble to anyone..one does not observe the barell of reality[in trading]..One is thus capable of unwittingly playing Russian roulette- and calling it by some alternative "lowrisk" name...a matter that makes people lose sight of their risks..The game seems terribly easy and we play along blithely."
pp28-29 Fooled by Randomness
 
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