The only thing I do not like about the argument is that i makes the assumption that when the bad event occurs the deep OTM option seller is wiped out. It is an all or nothing argument. However with good risk management there are ways to hedge during a severe drop to not lose everything. Forgetting a 9/11 situation for a moment, many Market Wizards spoke of how they were heavily long on the trading day before the 1987 October crash and when the market was tanking they liquidated and limited their losses and did not get wiped out. Some even liquidated and went short at the same time for a better hedge and even made money. If you are short options deep OTM on an index like S&P and the market starts falling, you can short futures (especially for those selling options on futures), roll into butterflies or other similar positions where you lock in a loss much smaller than the max loss. So you take a huge hit but still are alive. The problem is risk management and a fund putting all of its capital in naked positions so when the shit hits the fan they have no ability to hedge or take defensive positions. If such a fund leverages up the whole account on naked puts then they are truly screwed before the position even goes against them. Also, the deep OTM option writer is making profits month to month for a year before the bad event hits while the deep OTM purchaser is bleeding. Assume complementary positions where the write makes $250,000 in a year writing on $1MM account and then takes a $200,000 hit locking it in with the right hedging so that it is the maximum loss. The writer after 1 year and one month has an account of $1.05MM after the hit. The buyer, doing the same thing and bleeding $250,000 suddenly hits the jackpot and makes $500,000 (much bigger do to unlimited gain potentials) and now has an account after 1 year an 1 day $1.25MM. Looks good. But now let's say the bad event does not happen for 3 years. The writer has built up a nice stash of profits which are reinvested and the buyer is wittled down most of the account so that a big hit leaves him in negative territory perhaps. The writer is still positive. So I can think if many different scenarios where the write does better and where the buyer does better but it has nothing to do with the strategy, but everything to do with the risk management approach. Fat tails can be non-existent for years bleeding a buyer account such that when it hits big, they are still in an average position, while the seller, if risk management is applied correclty, can survive the bad swing and continue moving forward. On the other hand a buyer may make 3 or 4 times their account on that one lottery ticket. However it is still not all or nothing. So I do not like the comparison argument that a buyer or seller of fat tails is all or nothing. The buyer could lose very little month to month due to hedges and make a big home run and the seller could make little month to month and hedge the home run. Risk management. Even if the event is unexpected, the reaction to it should not be. The only exception I can see is a 9/11 event where markets close and re-open already gapped tremendously down with high volume spikes or access to hedging market is limited. Since market techology has improved where the exchanges have stated they would have backups nad not close, I am not sure how it would be handled today. Otherwise this is the true black swan of all swans and the main reason I do spreads instead of naked lol.
Taleb's hedge fund vehicle, Empirica LLC, exists no more. I've read lightly Taleb's book "Fooled by Randomness": there is a not a single interesting or original idea in the book or in this scribe's head. In fact, Taleb's tone belies his bitterness resulting from his grandfather's financial and political death in Lebanon. This man reeks of bitterness, envy, and a need to drag down any good speculator. Taleb's swipe at Robertson is especially revealing. Robertson clearly had outstanding trading ideas and outstanding results; yet this moron attributes Robertson's success to something called "randomness"--whatever that is. Taleb is just a booked up scribe who can't trade. And anyone who believes Taleb earned seven figures trading from a closed LLC should heed Gordon Gekko: "A fool and his money are lucky enough to get together in the first place."
I agree with optioncoach that the practice is not as black and white as it is made out to be. The theory as Li Ka shing points out certainly holds water and makes for great party conversation, but the fact is that Taleb has X amount of cash to put to work every single month. So given this great realization of black swans and 10 sigma events and all the things that may one day happen, what is Taleb buying and selling with his clients money every month? There are many option writers who would merely have a dented equity curve with a 50 point overnight gap in the S&P. Certainly those who just load the account with naked OTM contracts every month will be taken out feet first, but those who are serious long term net writers are more cognizant of the realistic risks and take the appropriate precautions in their portfolios. While no one likes giving up a few points a month in profits, Taleb did help us realize and understand that it is necessary for our continued trading success, and we can thank him for that.
That isn't one of Taleb's assumptions. For starters, the bulk of his trading is not in vanilla equity options. He looks for situations where things can go non-linear in a hurry, currency and income markets being a prime playground.
That "closed LLC" returned more funds to its investors than it took in - and that's after *keeping* the largest client. Taleb has done very very well, and the investors who had their money returned to them immediately went out recruiting wing traders.
He reminds me of the that poster Griffin or is it Riskarb?? They both sound the same. (I bet you they are the same).:eek:
CT state corporations site lists Taleb's Empirica LLC as closed. This listing is an example of a "fact". Random's statement that Taleb returned "more money" and "did well" is an example of a "baseless assertion". Like reading an author's novel, one gets much information about postors from postings: one can spot the net losing traders. Also, financial journalists often confuse simple facts like net worth and assets. Even respected DJ journalists err often in reporting government data, corporate data in ways that belie the reporter's ignorance of a subject: mistaking daily oil production for monthly oil production; mistaking corporate sales for earnings. Citing Businessweek for hedge fun manager's earnings belies a postor's gullibility. In the first place, fund partnership agreements often bar limited partners from divulging fund returns for obvious reasons; also, a failed fund manager like Taleb seeking to now hawk a book has an interest in showing high earnings for the same reason Trump tries to show clearly high personal net worth. In fact, recently Trump claimed a Manhattan estate sale; soon thereafter, Sam Zell--someone who has actually made money in NY real estate--said on the record that Trump had no equity but merely represented Hong Kong investors. In other words, when ignorant of the facts, read critically any sources. Also, a trader should know the difference between a primary and a secondary source. In trader's jargon, "secondary source" often means "bullshit".
Well, the Steelers would probably agree with you too If anything, Superbowl XL did show that it does help to have lady luck on your side... Never seen so many mistakes by refs in such an important game...
Conversely, another example of a "baseless assertion" would be the statement that Taleb doesn't make s**tloads of money.