What Nassim Taleb Did on Black Monday 1987

Doing lots of reading on this tail-hedging stuff, and what I'm seeing is what a lot of yall seem to be saying, and what just seems like the right answer - if you are going to tail hedge to significantly reduce your risk of a big draw-down, then it is going to significantly cost you to implement that reduced risk, significantly reducing your returns over time. As but one example (probably not the best one, just one I last looked at):

http://greyenlightenment.com/tail-hedging-part-2/
 
Along kinda-sorta the same lines, I had a thread where I asked about who normally wins over time - the option writer or the option buyer. Typically they are pretty close it seems. The only one where it seemed a clear, decisive edge over time one way or the other was to WRITERS of puts. The corollary would seem to be that buying puts is on average a costly, maybe overly costly (in terms of return) enterprise.
 
Saltynuts said:
Along kinda-sorta the same lines, I had a thread where I asked about who normally wins over time - the option writer or the option buyer. Typically they are pretty close it seems. The only one where it seemed a clear, decisive edge over time one way or the other was to WRITERS of puts. The corollary would seem to be that buying puts is on average a costly, maybe overly costly (in terms of return) enterprise.
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Ask LJM Partners how that put writing worked. Yes, you can google that too.
 
Here's a typical result of a long-dated OTM vol buying strategy betting on "black swans" over multiple asset classes. It's an expensive hope-and-pray-for-doom game:
 

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Saltynuts said:
Along kinda-sorta the same lines, I had a thread where I asked about who normally wins over time - the option writer or the option buyer.
More...

Universa is buying the puts from Karen the supertrader. Over a long time frame BOTH tend to lose money. OK, maybe not lose completely but under performing the market.

The problem with the Universa approach is, that for maximum profitability it requires a huge luck/skill in TIMING, when to get out of the position. It is not a automatic strategy, with this volatility, one has to close the puts close to the bottom otherwise paper profits can evaporate...
 
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Taleb got really lucky in 1987, not because the market crashed but because he was allowed to run this kind of strategy in a bank (OPM). He could have bled for years and gotten fired before he saw any kind of significant return. Usually banks like to be in the other side of these trades. And of course, he had done that with his own money, he would not have gotten super rich, he would just have a good year. But because he was using OPM he really got a huge levered exposure to what happened. But people should not look at this case and think that they will get rich buying options. Ask John Hussman how easy to get rich through option buying really is
 
Pekelo said:
Universa is buying the puts from Karen the supertrader. Over a long time frame BOTH tend to lose money. OK, maybe not lose completely but under performing the market.

The problem with the Universa approach is, that for maximum profitability it requires a huge luck/skill in TIMING, when to get out of the position. It is not a automatic strategy, with this volatility, one has to close the puts close to the bottom otherwise paper profits can evaporate...
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Pekelo, thanks! Question - how can over time both the option writer and option purchaser both lose money? Seems to me that if you are looking just at the options themselves (and ignoring holding the underlying), for one to lose money on average the other would have to make money on average? Thanks!
 
Butterball said:
Here's a typical result of a long-dated OTM vol buying strategy betting on "black swans" over multiple asset classes. It's an expensive hope-and-pray-for-doom game:
More...


Yea, I've seen things like this before. Put buying is pricey. Doesn't this strongly support put selling? But, doing so very cautiously to avoid blowing out your account.
 
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