====================== Dont know much about waterfowl but still enjoy being around game birds like water fowl ; also cant tell you exactly how insurance companies make money on flood insurance despite [2] two ''500 year'' Mississippi floods with USA not even 300 years old. Like the way a Morgan Stanley market maker summed up LTCM persistant refusal to take a loss; ''insane laverage''
It's funny that you should mention that, Murray... I was just finishing off the book "When Genius Failed" today... just goes to show that options gurus may know their theory, but they don't necessarily know their practice...
Take, for example, an S&P out of the money vertical credit spread... for example, say it has a $1000 limited upside with 90% probability and a $10,000 limited downside with 10% probability... Taleb's point (Black Swan etc) is that this is a losing strategy, from an expectancy viewpoint, even though the trader may be on a seemingly endless winning streak... that winning streak will soon enough be rudely interrupted by one or two trades that will eliminate all gains to date... Larry McMillan is in the same camp -- that camp being, if you are gonna spread, pay for a cheap debit spread and do not simply book small income from a credit spread with an unfavorable R:R -- McMillan, for this reason, is a proponent of long straddles i.e. many losers, but sooner or later you get it all back and some...
I wouldn't even consider LTCM's situation to be a "black swan" event in the end, they were undone because the whole street was pressing against them -- either there were copycat funds cutting losses and pushing them along deeper into red, or others betting against them knowing they were against the ropes. When you're consistently overleveraged in a relatively illiquid market, it's usually just a matter of time until a blowout occurs.
I was flat going into 9/11 in all of my accounts. After the successful test of the selling climax I decided to tip toe back in via a some OTM NDX and DJX options. They did fairly well... so no, I didn't get hurt. Until I read Taleb's book a year ago I didn't even know the significance of a black swan. It made me remember seeing some in Austrailia (and having taken pictures) in my off time during a business trip in '01. I'll post it for fun. Please excuse the crappy photography. I was using a disposable camera and I didn't realize that I was looking at something so interesting at the time.
Yes, they happen, but I haven't suffered too much from them - at least, not in the long run. When Greenspan lowered rates for the first time in March (?) 2001, I was caught on the wrong side of an ES swing trade... But then, a few months after that painful event, on 9/11, I was caught short a bunch of stuff... Evened out for the year, at least for me. On the other hand, selling naked puts for good stocks, on support, has been a staple of mine for both income and for acquiring stocks I want to own for the longer term (a few months.) Unexpected events is what gets me those stocks cheap and I have always been able to get out of those positions with both good income and a good profit, on time. Now that I've said it, though, I'm certain that all hell will break loose next time... Perhaps fall into the next Enron, Worldcom and Lucent, all at once
============================================ That was a fun picture of 2 black swans. Not promoting selling or planned buying of options here; but buyers certainly have fun & sellers must know their practice , dont know if they have as much fun.