Taleb stipulated that? How are fat tails underpriced? An even better question...how did you register five years ago and only have one post?
Ya, Taleb thinks that we underprice low delta options because we are not good at quantifying the risk associated with very large moves. It's in Fooled by Randomness. It's not to say that you can't produce very long strings of wins selling that 'junk' but one day you wake up and 1987 happens or 1998 (LTCM) or 2008/2009. The moves during those crises are 3, 4, 5 standard deviation moves that options do not price well. At the end of the day, how you win with strategies like Karen's is just to be lucky to have the wrong position on during those kind of moves. Registered for 5 years and one post, I know. I'm trying to branch out and not drive myself crazy trading in isolation. Hopefully I can learn a bunch from you guys and make some sort of contribution in the process.
I think some of you are not really listening to what she says in the video. Lets say she is selling puts on the SPX today (but she wouldn't until Dec 21st = exactly 56 days left until expiration): 1: She pretends the SP is actually 100 points lower than it really is. Example: Yesterday's SPX close = 1418. 1418 - 100 = 1318. 2: Then she sell's puts even -10% lower then the pretend price. 1318 X .90 = (1318 minus -10%) = 1186 (1185 put strike). 3: Now she doesn't sell the puts until there is exactly 56 days (8 weeks) left until expiration. 4: That means she wouldn't sell anything right now, but would wait until December 21st expiration day and then sell February 2013 (56 days to expire) put strikes at SPX -100 points, minus another -10%. (This is the sell point where her software says there is only a 5% probability of the SPX finishing in the money. That means the trade has a 95% probability of success). 5: If the trade gets in trouble: i.e....her software now says there's a 30% probability the puts will finish in the money, "then" she starts selling calls to re-balance out the equation. (She says its all math.) Put_Master must love this because this is similar to what he does with stocks. That's my read of it after watching the video 4-5 times. Jeff
Woulldn't everyone sell far otm options and win if it was that easy? What am I missing here? How did this not blow up in 2008? *According to the previous poster's observations, I can see her surviving if she's selling 200 points away and rolling, but the drawdown, I mean, you might vomit out of your ass and mouth at the same time.
I agree with what your saying and how about March 2009 when the SPX dropped to 666! But according to her in the video, she has 5 traders constantly watching the software probabilities and as the probability of naked put sells expiring ITM increases to 30% and greater, they just keep selling naked calls to balance out the equations. I kind of wish Atticus and Put_Master would chime in here to enlighten us if this is really possible to accomplish her kind of trading in a sharp downturn like 2008 & beginning of 2009? Jeff
Well no, not in index. The problem is gearing under RegT and PM. The numbers aren't possible even assuming haircut = net liq (and assuming portfolio margin treatment). You simply can go beyond 10-15% in premium over her stated holding period (56 days?). A Feb 1360/1500 strangle nets $2,300 in credit at mid. A little beyond her stated holding period at 15.50 cash VIX. That position runs about $16k in RegT req and $10k under PM. Short 6 of those at a credit of $13,800. Return 13.8% over duration. 5-6 cycles per year, no losses and keeping every dollar of premium results in a compounded return of 92k~, $192k net liq (on the road, no calculator handy) under RegT and a stable 15.5 VIX. The stated returns are almost certainly impossible if considered 100% organic growth. Also assuming she was shorting naked puts or combos.
IOW, it cannot be done if bets are naked shorts. It would only be possible with debits (verts, flies, calendars) and delimited exotics.
under PM the margin requirements should actually be significantly less, as she's trading broad based indices (+6/-8), so her PM margin to that strangle would be closer to $3600
Yeah, I didn't check PM haircut. TOS did not offer PM on $100k accounts at the time in question. Assume she went to 25 lots every 60 days. $1.5MM net liq at the end of the first year. Of course it's complete BS as a move under 1SD would put her on call. This is assuming she kept every dollar of every contract sold.