Taleb -Black Swan on $1,000 per month

Discussion in 'Options' started by drenaud, May 10, 2011.

  1. drenaud


    I am willing to spend $1,000 per month betting on a black swan.

    My thoughts were to purchase SP500 puts (ES). But then I got stuck.

    Do I purchase a few puts that are close to the money? Do I purchase puts that are many months out?

    It seems that Taleb purchased options for between .05 and .25. This implies that he bought way out of the money and\or of short duration.

    My question is if I am willing to sink the $1,000 per month what will give the biggest bang if the a big negative event happens?


  2. cfelicio


    certainly far out of the money, and short term will give the best bang if the black swan happens.

    Silver is a recent example, there was a thread here that someone bought $0.25 options, sold them at $5, but in the end they went all the way up to $37. That would make a 100x+ return in a few days...

    Unfortunately those events are rare and hard to catch, I'm sure Taleb has a lot of capital (so he can be invested in many markets at same time), and also he mentioned somewhere that he tries to lose the minimum amount possible monthly, so it's not like he is letting the options expire worthless imo...
  3. Unfortunately this is the art in buying blackswan insurance. If you buy the wrong asset you may not get a good hedge. And every "blackswan event" is different.

    I don't think there is a right answer to this. Generally the further your put the more money you will make if the market sells off to there, but the less likely it is for the market to sell off to there. Thus the condundrum.
  4. you may want to look at interest rate futures when and if the shit hits the fan treasuries always go bid.
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  5. Maverick74


    I think you are misunderstanding what a black swan is. A black swan by definition cannot be a stock market crash. You have to bet on something to happen that has NOT happened before, hence a black swan.

    When Taleb made a fortune in 1987 option prices did not have a put skew. They never were priced for the possibility of a 23% drop in one day. Same with the Euro Dollar calls he was long. After the 87 crash the put skew surfaced and made betting on a crash next to impossible. Once something happens the market looks in the rear view mirror and prices in the possibility of that event happening again.

    What you need to do is bet on something that not only has not happened but also something that nobody thinks will happen. Another example was the mortgage meltdown. The CDS on mortgages were priced in with a zero probability of a default (for the most part). Nobody ever thought housing prices could even decline much less default. So guys like Paulson were actually putting on a trade that cost next to nothing betting on an event that has never happened and nobody expected to happen.

    Obviously betting on something that meets this criteria is difficult. It's kind of like saying, invent the next twitter or facebook. Just think really hard, it will come to you. Then once it is invented you say to yourself, why didn't I think of that.

    Anyway, the problem you have betting on anything that "could" happen is that option prices will price that in. They are in the business of pricing in all probabilities. Once you price that stuff in, there really is no edge in betting on it.
  6. "Black Swan" can be positive also. This is how I would handle it:

    • Make a short list of stocks with weekly options.
    • GOOG, QQQ, AAPL should be on the list.
    • Buy Calls or Puts , 1 or 2 strikes OTM.
    • Purchase on Monday or Tuesday - Expire Friday.
    • Close when 100%+ has been reached, hopefully within 2 days.

    Example "Black Swan" trade with GOOG.
    • GOOG @ $542.66.
    • Buy May 2011 550.00 call @ $0.90 - They expire this Friday.
    • GOOG rises 3% in 3 days - The "Black Swan" you need.
    • Options worth $4.00 :)
  7. Maverick74


    That's not a black swan. LOL. Those are called outliers. Nothing wrong with that strategy just saying there is a distinction between an outlier and a black swan. Outliers are "expected" to happen from time to time.
  8. That's why I have black swan in italics or quote marks around it. To indicate it's not really a black swan.
  9. Taleb closed his fund after some lackluster results in the early 2000s. The reason he gave was that he wished to dedicate himself to his writings (obviously concerned with concepts that cannot be put into practice).
  10. I was just reading a summary of a report that said for buyers of ATM index put options to make a profit, a 1987-type event would have to occur 1.3 times a year. AFAIK it didn't say anything about cheap OTM options.

    I'll see if I can find a link.

    EDIT: Here it is.


    and the quote:

    # For buyers of at-the-money puts to break even, October 1987-like crashes would have to occur 1.3 times per year.
    #10     May 11, 2011