I think the problem here is overleverage, which eventually leads the sellers to blow up. Therefore, you also need to overleverage on the buy side, but then you may run out of capital before that big payday comes.
Nassim Taleb was one of the guys i know and was very familiar with this. in fact i thought about doing this a year ago, but i really was not confident on my understanding of option pricing. if you think about it, nassim andj buffett share common character in that they both make ton of money when everyone else falls. this is more indirect for mr. buffett of course who is able to acquire discounted shares and make money eventually, while taleb has shown large success with purchasing OTM regularly....i think this is what he did, please dont quote me.
i dont know much about nassam, but buffet is doing something completely different. He does not "trade", all his purchses are long term investments. In fact recently, he actually wrote a large amount of leap puts on the sp500, i believe he wrote it naked too (but dont quote me on that).
yea of course, buffett is not a "trader". but theres commonality that both exploit when everyone is panicking or have lost their shirts.
Is Nassim Taleb a trader? I thought he was just an academic who wrote silly articles claiming that option pricing models are irrelevant and unused. If he's actually had success as a trader, I'd be curious to know more. Most academics haven't done well in the real trading world. Remember the geniuses at Long Term Capital?
his one of the few, being an academic, he has done very well in trading desks. read his books. theres a difference between someone who has gone through all the academics, years of study, and admit that it has major flaws, to someone who never went through the process and claims the same thing. the former is much more credible.
I haven't read his books, but I did read a paper he co-authored with Espen Haug called "Why we have never used the Black-Scholes-Merton option pricing formula." That paper is so absurd - and demonstrates so thorough a lack of understanding of how an option trader with any degree of sophistication uses option pricing models - that I can't help but wonder about his claims of being a successful trader. I don't even know where to start in explaining why I find the article so ridiculous, but here's a sample. He writes: "There are indeed two myths: - That we had to wait for the Black-Scholes-Merton options formula to trade the product, price options, and manage option books. In fact the introduction of the Black, Scholes and Merton argument increased our risks and set us back in risk management. More generally, it is a myth that traders rely on theories, even less a general equilibrium theory, to price options. - That we "use" the Black-Scholes-Merton options pricing formula. We simply don't." Okay, so there you have it. Nobody actually uses the BSM formula. He makes that clear at several points in the article. So it's interesting that his co-author, Espen Haug, begins his book "The Complete Guide to Option Pricing Formulas" as follows: "The BSM formula and its binomial counterpart may easily be the most used 'probability model/tool' in everyday use - even if we consider all other scientific disciplines. Literally tens of thousands of people, including traders, market makers, and salespeople, use option formulas several times a day." And it only goes downhill from there. Maybe Taleb is a smart guy and a good author and he just had a bad day when he wrote that article. But after reading it, I find it hard to take him seriously.