Taleb's concept of making an (infrequent) killing with options

C

cognitivefun

Taleb wrote the excellent book Fooled by Randomness. He shows how humans consistently mistake probability with expectation (probability times pay-off percentage).

When you buy very OTM put options, you can get them cheap. They will expire worthless.

But if you keep doing this, there will come a "rare event" that will make you suddenly very well off. The theory is that due to the frailty of the human mind, and the mistaken use of mathematical models, the pay-off will be much larger than your steady losses, and you will make a fortune with options.

The tough thing is to stay with this type of program. Most people would rather make money consistently, or at least most of the time, than lose money consistently but make it in sudden, unpredictable bunches.

Apparently Taleb runs Empirica Capital a hedge fund with $300 million, with this basic idea.
 
The long option profile is often compared to the trend follower profile: high proportion of losing trades + limited loss potential (apart from bleeding to death) in exchange for occasional massive gains.

There are plenty of trend followers with more than $100 million net worth. None of them do it with options though, at least not any I've heard of.

Most of Empirica's clients are looking to hedge other bets, by Taleb's own admission, and word is he's actually a better theoretician than trader.
 
The question is how far out should the options be? If I was running this strategy right now, I would look to buy SPX puts for a nickel, like the june 900s now. I'd probably score big once every few years, a 10 handle move is pretty major. A major terrorist attack is simple a question of when, not if
 
Quote from ig0r:

The question is how far out should the options be?
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by definition, rare surprise market "events" develop quickly. buying time premie would be a waste.
 
Quote from damir00:

taleb doesn't "trade", empirica is completely automated.
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a mechanical trader is still a trader - what else would he be, short term investor / insurance broker? :confused:

the source I heard the comment from was a colleague of Taleb's prior to Empirica anyway
 
Hey guys, has it ever occurred to you that Taleb does not just buy options, but rather is a net buyer of them. There is a big big difference.
 
Quote from darkhorse:

a mechanical trader is still a trader
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not really. mechanical trading is just applied theory - and as you pointed out, he's a good theoretician.
 
Quote from Maverick74:

Hey guys, has it ever occurred to you that Taleb does not just buy options, but rather is a net buyer of them. There is a big big difference.
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Sure it's occurred to me - financing your position with a backspread or some other combination adjusted for fat tails makes sense, especially if you have to maintain positions across a broad number of markets at all times.

I doubt that Taleb goes short on volatility all that much, given his loudly trumpeted aversion to risk and belief in random walk - unless he walks differently than he talks.

So given that, how does the complexity of his strategy make a big difference in practice, other than letting him bleed a little slower in exchange for a little less upside?
 
Quote from damir00:

by definition, rare surprise market "events" develop quickly. buying time premie would be a waste.
More...

by buying the junes right now, i was insinuating that i would be buying front months

therefore paying very little in premium, I would buy the nickel strikes anyways

it may be a decent strategy if you have the capital to handle a long term bleed
 
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