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

the pay-off will be much larger than your steady losses.
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Yes, Taleb is engaged in strategies that are "negative carry" that is they cost you money if nothing happens (you pay every day to be "in" such trades/strategy which is a tough thing to do as they are emotionally hard to maintain)

Another interesting trait of Taleb is his claim that he doesn't look at P&L except if it crosses one and a half standard deviations. He says that below this threshold, his emotions don't know the difference.
 
Quote from damir00:

not really. mechanical trading is just applied theory - and as you pointed out, he's a good theoretician.
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lol, ok

Next time I run into a mechanical trader struggling with whether or not to modify his system after a long string of losses, or wondering if he should change his portfolio allocation or adjust his risk for unexpected volatility, I'll say "hey man, relax, you're not actually trading - it's just applied theory"
 
Quote from darkhorse:

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?
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No, he can sell front month options to pay for back month. He can still be net long options and he will profit from any fat tails, but he will cut his bleeding substantially and in some cases completely. He is not trying to focus on selling volatility, but rather selling overpriced options relative to the ones he is buying in the back months. This is his game. And it gives him the long premium exposure he is looking for.
 
Quote from Maverick74:

No, he can sell front month options to pay for back month. He can still be net long options and he will profit from any fat tails, but he will cut his bleeding substantially and in some cases completely. He is not trying to focus on selling volatility, but rather selling overpriced options relative to the ones he is buying in the back months. This is his game. And it gives him the long premium exposure he is looking for.
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But to get long premium exposure, he still has to maintain negative carry to some degree. No one disputed that the amount of carry can be lowered, but it can't be removed completely. There's no free lunch, and no deal you can come up with that will create positive exposure without cost. Who would take the other side?

If Taleb were looking to adjust options prices, he would be a market maker / anomaly hunter like Susquehanna. But he's not. He's a "black swan" guy with a philosophy of maintaining consistent exposure in the hope of capturing profits from rare events, and it's not his style to implement strategies that involve prediction. Have you read his book?

While the strategies you talk about make sense, to the best of my knowledge they have nothing to do with Taleb's professed philosophy or approach. Again, unless he has changed his stripes significantly in recent years, what you see is what you get. Taleb himself is the one who explained his strategy in stark straightforward terms of bleeding until something big happens.
 
If you read the the Gladwell article you might get a better insight into it.

If you can, please explain it to me as a complete dummy in plain English.

The article makes it appear as if he is losing 40% or so on a daily basis. If he was just buying very OTM puts he would be losing decay every day with no offsetting gain at all, right?

If he is selling front months then wouldn't he be limiting his gains severely when the black swan happens? So why would he do this?

Also, if you buy puts for, say, JAN05 and a Big Crash happens in October, you may sell the puts before expiration, and you would not lose any more time value than if you continually bought, say, one month forward and had it decay to nothing and re-purchased the next month. So it would be easier and perhaps cheaper (in terms of transaction costs including slippage) to buy longer term very OTM options that do have substantial time value left.

And why buy calls at all? Really puts would be fine as surprises are primarily on the downside.

Can you please comment? This is getting very interesting.
 
Quote from darkhorse:

But to get long premium exposure, he still has to maintain negative carry to some degree. No one disputed that the amount of carry can be lowered, but it can't be removed completely. There's no free lunch, and no deal you can come up with that will create positive exposure without cost. Who would take the other side?

If Taleb were looking to adjust options prices, he would be a market maker / anomaly hunter like Susquehanna. But he's not. He's a "black swan" guy with a philosophy of maintaining consistent exposure in the hope of capturing profits from rare events, and it's not his style to implement strategies that involve prediction. Have you read his book?

While the strategies you talk about make sense, to the best of my knowledge they have nothing to do with Taleb's professed philosophy or approach. Again, unless he has changed his stripes significantly in recent years, what you see is what you get. Taleb himself is the one who explained his strategy in stark straightforward terms of bleeding until something big happens.
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Darkhouse, I know Taleb very well. I have read his book at least 10 times. Refer to a thread I had about 5 to 8 months ago called the perfect option position. It's very easy to do what I am referring to. I can create a position right now as we speak that will give me slightly negative theta but will switch to long theta as front month expiration approaches. It will also give me long vega and net long options on the back month to profit from any black swan event. I went over this strategy in detail on my thread. Why would a MM take the other side of it? Easy, it's called edge. There are 8 sides to the trade and the MM will capture the edge on each of them. He never had it so good.

Now does selling the front month limit his upside? No, it does not. He has an unlimited upside position. He just has to change the size of his position. When you dissect his position he basically has a long strangle. The only difference is he has financed it with other options and a slightly different structure.

Now obviously I am not sitting next to the guy so I don't know exactly what is going through his head or exactly what he is doing. What I do now is there are a thousand ways to skin a sheep. Don't think for a second he is just blindly buying deep OTM options and playing online chess waiting for something to happen. He is one of the most respected derivatives traders in the world. Give the guy a little more credit then that.
 
Quote from cognitivefun:

Apparently Taleb runs Empirica Capital a hedge fund with $300 million, with this basic idea.
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LMAO; no way he's managing 300mm... He goes long Treasuries and buys gamma with the coupon.

It's also somewhat telling that there is NO RECORD of Taleb with the hedge fund monitors such as MAR.

FWIW, I've gathered from reading Taleb's stuff that he doesn't favor spreading; prefers the gamma/unlimited payoff of simply being long combos.
 
Quote from Maverick74:


Don't think for a second he is just blindly buying deep OTM options and playing online chess waiting for something to happen. He is one of the most respected derivatives traders in the world. Give the guy a little more credit then that.
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I didn't mean to sound like I was writing him off entirely; you're probably right that he deserves more credit than I've given him.

Ya gotta admit though, while he may not be playing online chess, he does brag in his book about visiting museums and working out during the trading day :D

Does anyone know Empirica's track record over the past few years, or how his assets under management have fared?
 
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