Let's see, if options are fairly priced, then neither buyers nor sellers on average have any advantage. Both will lose money after commissions and slippage. So if options are fairly priced, Taleb will at most breakeven unless the tails are way underpriced since he and his associates mostly hedged the tails (or bought tails?). Have anyone here done any tail analysis to determine that his method won't work because after 1987, 1997, 2000 and 2008, tail events are priced in? Thanks.
Its been a few years since I read his book but I think the whole premise was that tail events are more common than the market thinks. He used a bunch of fancy words and math but I remember thinking that was all he was really saying. Maybe I misunderstood...
Interesting you said that. I read his books, lots of self promotion and rants but no quantitative discussions or results, so not sure how good is his method. Don't think he quantified the tail probabilities, instead said they were not quantifiable. Is he right or are the market/others more right?
it does not work because: skew on OTM puts is too steep (this makes options decay too fast and too expensive) interest rates are too low (this makes stock more attractive) excluding 1987, the expected value of put buying strategy is negative . Because this method constantly loses money, there may come a point where you may never be able to recover, even if there is another crash. When the market falls, even just 2-4%, all IVs get ratcheted up, which means the method becomes much less profitable than it already is .