What i think you are trying to say is Taleb sells front month or near by gamma to offset some of his longer dated vega exposure. Bottom line,it appears he is backspread and instead of having a "pure" backspread he is essentially "goes long a calender "which creates short vol in the front months and long it further out. Net,he is long vega,backspread and as RiskArb pointed out,other than energy,that was the wrong position to have on
All that follows is pure speculation and not based on any knowledge of Taleb's operations or strategy: I'm not convinced he waits for the large sigma moves to take profits, though that is when he'd make a killing naturally. Much smaller moves could be capitalized upon on a regular basis. In addition, I suspect the calendarized backspreads/wrangles are traded on a rolling basis so as to attempt to reduce the cost basis for the long vol. Perhaps, a pseudo dispersion strategy/fly is employed?: long strangles or OTM options on tickers to take advantage of the propensity to gap that are not priced into the options (I believe some degree of automation is employed by Taleb to search out undervalued OTM options?) and short gamma on indexes. 2 cents. MoMoney.
Mo,I dont know about you,but i dont know ANYONE who has made money trading a dispersion type strategy that didnt "oversell" index premium to the point where tail moves work against them... If taleb made money the last 3 years with a strategy similar to that,he is as good as he boasts
Dispersion is not about deltas, it's about correlation. Any competent disp trader will maintain neutral to long gamma, regardless of long or short the dispersion trade.
It should be about implied correlation,but it hasnt been the last 3.5 years.I dont know where delta came in to the conversation. Off the top of my head,if you are neutral gamma/theta that means you oversold index vol.You would probably be short 2x index notional as you are long equity notional. You may not think you are trading deltas,but you definitely have a delta bet on at these vol levels
I doubt he has been thru the sustained crunching of vol cycle that began in late 2002.If the posters are correct to his approach,this equity vol contraction cycle could not be kind to his style of trading.. Its no knock against him
Yeah okay, forget I said pseudo-dispersion. There is no correlation or stat arb facet to what I understand Taleb's strategy to be. Then again, I'm just making this stuff up.
You contradict yourself in your first and third paragraph. Overselling index premium manufactures deltas through gamma, which is deleterious to your +disp, as it's "bad gamma". Short disp involves selling the vol box -- cheap index vol expresses cheap gamma and dgamma/dX if trading otm; or finding yourself otm through market movement. I haven't a clue how you arrived at your "delta bet" comment. My guess is obfuscation.