The article makes it seem like Taleb is immune from fatal losses. As more traders sell volatility, Talebs strategy will earn thinner and thinner profits.
it doesn't mean guys who make steady money will go bust... it just means that guys who make income speculating that the economy will remain steady, they go bust. its the difference between saying that one person is as volatile as the entire human race.... there are many steady eddy's out there... and there are many volatile joe's too... futures traders try to be steady by making money from volatility.
Taleb himself said, 'we may bleed to death, but we won't blow up' or some such thing. HOWEVER; I don't have much option experience. The very little I have taught me well that when the big event happens and your premium goes off the chart, the quote is one thing, the fill is another. Big, short lived events (the kind that hurt Dr. Niederhoffer, that Taleb is betting on) are not the best time to doing be your max volume. Of course, if the conditions remain in that event state for some time, then the fills would be much more as quoted.
I believe he means the type of strategy that tends to produce steady returns, hence a high Sharpe, in derivatives is actually taking quite a bit of unseen risk. Example, selling covered calls. Generally thought of as a conservative strategy but exposes you to quite a bit of downside on the underlying. The functional equivalent, selling naked puts, is what blew out Niederhoffer I believe. A lot of money is managed using metrics like the Sharpe ratio, which compares your average monthly return to the volatility of your returns. Making occasional huge profits actually hurts your Sharpe and would lead an MBA-type to label you as a risky trader, even though you made a big profit.
A covered call strategy with no stop loss is dangerous. But where (except for gaps) is the risk when you have an exit strategy just in case? Also selling volatility does not mean that you are totally open to infinite (theoretically) risk/damage. By using a spread you can enter a risk/reward ratio that you approve of. The "equiprobability" concept is to stress the fact that randomness doesn't necessarily look random. In fact random series can have a lot of trend in them. In an experiment (from the book Beyond Greed and Fear) students were asked to pretend to be flipping coins and then to write down the pretend result. Another group flipped coins and wrote down either H or T. The result? the group that were imagining the result of flips were switching from H to T and back again much more than the real flips. Actually in a random flip you can get a really good streak of Hs and Ts going. As it is illustrated in the chart that was posted. Randomness and equiprobability are two separate concepts.
guess you got me here. I figured 'equiprobability' meant 'equally probable' or 50/50, ergo, cointoss. in your post you call a cointoss 'random,' and say that randomness and equiprobability are not synonymous. Can you explain?
I love Taleb's work. I've took his work to heart both in my trading and in my personal life. We can debate his strategies and find issue with his methods here or there but I think the main thrust of his thinking is correct. Life is rife with unforseen and unpreventable risks. One can either prepare and profit or falter and repent. I try not to get to personal on these boards but Taleb's theories relate directly to my experiences. Specifically I am a reformed premium seller. Coming out of college eight months ago I devised an options system that incorporated a great deal of premium selling. Admittedly I thought I had found the path to nirvana, sell hope to the masses in the form of options premium. I knew from my backtesting that it would be a rocky ride. Well it didn't take long for this fool to be seperated from his money. The tragedy of September 11th nearly took me out in my first month. Since then it has been quite a personal struggle learning and relearning, testing and debunking many theories and approaches. It hasn't been easy. Personally to watch my friends live out happy middle class lives with their new cars and posh engineering jobs while I scrape by trying to swing for the fences has been less than pleasant. From my experiences I now know that there are only 5 or 6 decisions or events in the spectrum between homelessness and millionaire status. It's quite a humbling concept. I think this is the point of Taleb's book and life's work; to live life with diligence, dignity, and compassion, for we never know what could be around the next corner in trading or in life.