How does Taleb know when to cash out of the puts?

Discussion in 'Strategy Development' started by Pekelo, Nov 22, 2008.

  1. Pekelo


    Nassim Taleb's fund is reportedly up huge this year, due to him playing out of the money options. But it rises the question: how does he time the eventual market bottom when his gains are the biggest?

    Let's assume the market bottomed for good last Friday. Is he out now? Or does he keep buying more OTM options? How does his strategy work? After all with options he has to cash out sooner or later...
  2. ammo


    with the vix up here ,you get massive premium decay with your option trades if you call the market right, and there is nothing in the pipeline to say we are going up as of yet, when we do bottom and vix comes down , the decay will be huge
  3. I would guess in times of low implied volatility he is long the wings and short the guts, but net long more options than he is short. After a huge event like the recent one when implied volatility spikes he will have huge mtm returns from being net positive vega and long gamma. He will probably on an almost continous basis be restructuring and at this moment, my guess is probably earning theta, slight short gamma and vega, but still long the wings and net long more options than he is short. If we start going lower again, his structure will swing him long vega/long gamma and will be swung delta short again. Basically the management is a continous process and i am sure he has been adjusting a few times a day over the last month capitalising in the process, and hedging against negative theta traps that could evolve in time if he just sat idle and all the while monitoring his vega profile.
  4. Pekelo


    OK, let's say the S&P rallies 200 points from the 740 low and for the next 2-3 months it stays in a 100 pts range. That is not particulary good for Taleb's strategy, it needs a constantly falling market, correct?
    The point is that although with his entry he doesn't need a good timing, (he just constantly waits for a break), but once the break occurs, he still needs to time well the possibly most profitable exit...
    He can not know if the market rallies back or goes sideways for an extended period of time...
  5. He cashes out when his eyeballs start rolling like a jackpot machine after looking at his P&L......then he knows its time to hit the "Cash Out" button! :eek:

  6. ammo


    no one can, but with options you can adjust your position to neutral when it goes against you, and take the protection off when it starts coming back, if you are spread with long and short calls and long and short puts,if you lift a partial or entire leg you are protected, or add to your position, Pek, you know all this already ,don't you?
  7. Pekelo


    Well, I guess my problem with his strategy is that it still depends on market timing for the exit or adjustments. Now how he does it technically that is another question. He can easily misstime the lifting of the protective leg....

    Since we are in a bearmarket, I could design an anti-Taleb strategy, that works exactly the opposite way like his and trying to take advantages of vicious bearmarket rallies. So I keep buying OTM calls for a small amount of the AUM, and when the bearmarket rally occurs, I cash out....

    Interesting article discussing this problem:

    ""He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October's.

    Assets under management at Universa have neared $2 billion since the fund launched early last year with $300 million under management. While Mr. Taleb frequently consults with Universa's traders, the Santa Monica, Calif., fund is owned and managed by Mark Spitznagel, who worked for several years in the 1990s as a pit trader on the Chicago Board of Trade.

    The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility."
  8. rosy2


    has taleb ever made any money trading. his old fund closed up
  9. When he starts getting swamped with interview requests.

  10. Here is a chart of spy 75 puts, who would of thought a year ago this would be close to being in the money. You really don't know how he trades but 1500 calls a year out are cheap should we get a major reversal. You can also go long strangles.
    #10     Nov 23, 2008