You guys are missing the market. 370 basis points in Eurodollar futures is HUGE!!! Best I can tell the Eurodollar market was at 6.5%-8.5%. If the ES sold off ~50% do you think you could find options that went up 670X? Off course you could. That would be a 1000 point move!
OK, that was the other possibility, that options with extremely high potential payoffs don't exist in something like the SP500 market now, but maybe they existed before 1987 (or 1929 or whatever). So now we should be betting for something extreme that has never happened. Something that I found quite ironic about the barbell investment strategy that Taleb recommends, is that he talks about investing 90% in something risk free, like treasury bills. Treasury Bills aren't risk free! Actually betting against them makes sense following his philosophy. You can bet either for hyperinflation or a US default. So something like buying gold OTM calls or betting in some way that the US government will default (I think the first scenario is more likely). Or you could also bet for the end of the US dollar, by also buying gold calls, or bitcoins, or whatever. 670 times is possible, and has happened. But Taleb talks about 67000 and 750000 times...
No, don't make this into an investment strategy, that is not his point. He is trying to get people to understand risk. And yes, before 1987, there was no pronounced put skew in the index market. After 1987....huge put skew. And to correct you, treasury bills are risk free. He is referring to 12 month T-bills that are sold at discount. They carry no inflation risk. The underlying denominated currency does but that is a constant since I imagine all your investments are denominated in the same currency.
Why are treasury bills risk free? It may seem extremely unlikely that you don't get your money back, but that possibility exists. There's counterparty risk. If that possibility isn't being considered, or priced, then it's similar to what you said about CDS.
No, there is no risk. The government can raise taxes to pay back their debt. There is zero counterparty risk by definition.
Or print money, but that's if they want to give you your money back. What happens if they don't want to, because of a 1917 like revolution or whatever? I know the probability is minuscule, but higher than zero. If it isn't being priced, maybe you can buy lottery tickets for 0. I know it's a very exaggerated case, but it would be a Black Swan if it isn't being priced in.
Then by your logic, no currency will have any value including your lottery tickets unless you are buying them denominated in coconuts.
You could bet in a currency different than USD that the government will default . It may be more complicated to find a counterparty, but it's a possible bet. When lending money to another party, the best possible scenario is that they return it to you (plus interest), but nothing better can happen, while worse things can happen. A flight may arrive 10 hours later, but it can't arrive 10 hours sooner, volatility can only hurt you. Anyway, this was just an example of something that everybody seems to think it's 0% possible to happen, but that's false, even if the probability is extremely minuscule. So maybe there's a way to buy free lottery tickets (or nearly free, but with positive expected value). Just like people before 1987 sold OTM options too cheap.
You need to think this through your head a little more. Your lottery would not offer you a payoff at all. Just do some simple math. And also, volatility can absolutely help you. How would you make money without it. Think about it before you answer.
In this exact case, betting against the government paying its debts, maybe there would be no payoff in the financial markets, but a bet could be made outside. For example, we can make the bet, if you really think it's completely risk-free, you would ask me for very small odds. And if I find them reasonable, I would accept the bet. We could bet in bitcoins, gold, coconuts, or whatever.