Apologies to those earlier posters who's words I'm just repeating, but ... Your statement ("...should only happen less often than ..." etc) is only correct if price distributions are normal Gaussian distributions. If they are not (and it's accepted wisdom that they are not ... i.e. price distributions are reckoned to have "wide tails" ... note earlier poster's alias "Wide Tailz"), then these tail events can happen much more frequently than they would do if the market was a pure, normal distribution. So, in general market prices don't follow normal distributions ... Just because market prices don't follow normal distributions doesn't mean they don't follow other distributions. Here's a list of other probability distributions ... http://en.wikipedia.org/wiki/List_of_probability_distributions A distribution does not have to be a normal distribution for probabilities to be useful.
My point was to go long the tails.... high probability tails of course. Since you can't calculate how big they will be (18SD) you might as well calculate how often they occur, under what conditions, what market mood, where the suckerz happen to be at the time, any new derivatives that could trigger it, etc. It's like betting on the herd eventually getting startled.... you've seen it all play out before, and there is a pattern of circumstances behind it. I don't mean just buy puts blindly... For example: during POMO in 2010 The Market refused to sell off. No matter how bad the macro fundamentals looked, all dips could have been bought for huge $$$. The "worst" stocks (consumer discretionary) for a recession were skying the hardest. QE4EVA (2013) appears to be having the same effect. The tail of slow hyperinflation and / or currency conflict (which leads to economic conflict and sometimes war) is at the starting gate...... Only this time it seems homebuilders, large banks and defense co's are putting up the straightest trajectory :eek:
You might also look into empirical distributions and probabilities. We could get hit by a gigantic meteor some time, or the sun might implode, in which case none of these problems would matter as much either. The point is that you do the best with what you have. The other choice is that you could put your money in a CD or under the mattress, both subject to loss as well. One thing you CAN do to control your end is not use heavy leverage. The only ones that get massacred are those on high leverage. I suspect many large leveraged funds are just 'hoping' the market will always be saved and sitting through massive drawdowns. Had the market not rolled back the tape after the flash crash, there would have been some major revelations there (worse than your 18 sigma observation).
YM 1:5 risk:reward (intraday). I buy low and sell high. Limit orders only. Here's the real crazy bit... I not only need the market to move favourably once,...but f*cking twice,...just for one trade!! What kind of edge have i got?? Magic fuckin mushrooms?? Haha.
In October '87 only a a very small number (two as I recall) small NYSE member firms went broke. The fact is good traders with realistic risk management weathered the storm and given the PA leading up to the break many made a lot of money. The real Black Swan event in the last half of the 20th century was the one no one talks much about -- Chernobyl. There were ample supplies of grain and many good traders were caught short across the entire complex. It was much easier to see that the market could easily (not would) crack wide open in the fall of 1987 and in the fall of 2008 than to anticipate the reactor would blow on a huge scale smack in the middle of Eastern Europe's bread basket. Since many of the best traders were actually well positioned and short equities of all sorts in both 87' and '08 they were not truly Black Swans. When Chernobyl blew the best traders were net short and poorly positioned for a sharp break and, in fact, were carried through and recapitalized in exchange for a cut of future trading profits by even deeper pocketed clearing firms. The reactor was truly unforeseeable (and a true Black Swan) whereas the others were foreseen by the best of eyes.
respectively you see a positive skew in commodities options because the tails send prices up..opposite to the index skew... seems impossible to price deep otm's considering the frequency of such events... theoretically you could make millions selling calls on ags for years and retire.. and the next guy could blow out the next week with the same strategy..