3 ms·

I would have to say, isn't betting on disaster going to end up one day having the counter party saying "sorry Nassim, I am bankrupt, I can't pay you"?

by codexon 11y ago

fiatmoney 11y ago
You can structure an options strategy so that you get the money up front, eg selling calls. And exchange-traded options are settled through the exchange, which is more neutral than a specific counterparty. It does get more complicated as you pursue more sophisticated strategies though.
c3534l 11y ago
If it's a short sale, then Nassim already has the money and is actually the one at risk of not being able to pay if the price skyrockets. There is a bottom to how low a stock can go, but no theoretical upper limit. Although realistically he'd likely be forced to buy into stock if it got too high, keep some reserve of money on hand, and be insured against extreme upticks anyway. A short sale is an agreement for a party to buy a stock at a discounted price on the condition that the other party buy it for that person at a later date. That is, I say "That Chinese stock isn't any good. In two months the price will go down. So tell you what, you give me the money for that stock and you'll get your stock in two months, no matter what the price plus some extra as a discount. If that price goes down, I pocket the difference. If it goes up, I pay that difference as well out of my own pocket." The article is behind a paywall, so I don't know what specific strategy he used. But it'd probably be something along those lines. A bet against someone that the price is going down using his own money. Besides, that sort of risk is exactly what stock traders do for a living - analyze and account for risk. And Nassim is a specialist in a special kind of risk: risks people don't encounter often and thus systematically underestimate.
- IkmoIkmo 11y ago
  > The article is behind a paywall Just copy-paste the article's title in google, then click it and the paywall disappears.
noname123 11y ago
Nassim Taleb buys options whose counterparty has multiple ways of hedging, Suppose Taleb buys a put on SPX (S&P500 index) from an counter-party with a strike price of 1880, most prudent counter-party would re-hedge themselves by spending some of Taleb's premium to buy a cheaper SPX at a strike price of 1800. Alternatively, the counterparty might put on dynamic hedge; meaning if SPX drops and it gets closer to Taleb's strike price, the Taleb counterparty will have to rush out and also short number of shares of SPX proportional to the option's pricing's sensitivity to the SPX, otherwise known as the delta of the option contract. Suppose the counterparty didn't hedge properly or the market was super-volatile like this week Monday and counterparty didn't act fast enough to hedge and is brankrupt; then usually the counterparty's broker has to steps in (e.g., Charles Schwab or TDAmeritrade for retail investors or a huge investment bank's brokerage services for a hedge fund). Suppose the trade is so huge that the broker defaults (e.g., when Swiss Franc de-pegged and blown up lots of retail forex accounts and forex brokers), each broker also has to go through a clearing broker who are the third-level of guarantor of the option contract; the two biggest one's for equity and options markets in US are Goldman Sachs Execution Services and Apex Clearing. Their sole job is to maintain a huge account of cash proportional to the trades they settle in case of settlement issues. Now suppose the GSEC and Apex defaults also; then I'm not sure anymore, I'm guessing that the guarantee responsibility falls upon the charter members of the option or equity exchange - the burden of debt is distributed to the member of the exchange (brokers, banks). If all the exchange collective members go bankrupt, then I guess at that point, that means collecting your option payment would be your least problem...
jgalt212 11y ago
How funny you should mention that. That's what Goldman did with AIG. AIG sold puts on basically the entire US housing market. GS, et al, were on the other side of this trade. If AIG couldn't pay off, effectively Goldman's house is burning down, but their fire insurance company (AIG) has just gone broke. That is, until the US Government bails out AIG (and by extension Goldman). GS has argued that they didn't need AIG b/c they were flat exposure to AIG. Technically, this may have been true, but unlikely. In any case, if AIG went under other folks who owed GS money would not be able to pay because AIG could not pay (and AIG owed everyone money). So really GS was very much tethered to AIG. But you do bring up a good point. It's very difficult to make money betting on the end of the world, because if the world ends, who will be around to pay you. For these reasons, central governments/banks have been the underwriter of end of the world insurance through their lender of last resort functionalities.

I would have to say, isn't betting on disaster going to end up one day having the counter party saying "sorry Nassim, I am bankrupt, I can't pay you"?

by codexon 11y ago

I would have to say, isn't betting on disaster going to end up one day having the counter party saying "sorry Nassim, I am bankrupt, I can't pay you"?

fiatmoney 11y ago

You can structure an options strategy so that you get the money up front, eg selling calls. And exchange-traded options are settled through the exchange, which is more neutral than a specific counterparty. It does get more complicated as you pursue more sophisticated strategies though.

c3534l 11y ago

If it's a short sale, then Nassim already has the money and is actually the one at risk of not being able to pay if the price skyrockets. There is a bottom to how low a stock can go, but no theoretical upper limit. Although realistically he'd likely be forced to buy into stock if it got too high, keep some reserve of money on hand, and be insured against extreme upticks anyway. A short sale is an agreement for a party to buy a stock at a discounted price on the condition that the other party buy it for that person at a later date. That is, I say "That Chinese stock isn't any good. In two months the price will go down. So tell you what, you give me the money for that stock and you'll get your stock in two months, no matter what the price plus some extra as a discount. If that price goes down, I pocket the difference. If it goes up, I pay that difference as well out of my own pocket." The article is behind a paywall, so I don't know what specific strategy he used. But it'd probably be something along those lines. A bet against someone that the price is going down using his own money. Besides, that sort of risk is exactly what stock traders do for a living - analyze and account for risk. And Nassim is a specialist in a special kind of risk: risks people don't encounter often and thus systematically underestimate.

IkmoIkmo 11y ago
> The article is behind a paywall Just copy-paste the article's title in google, then click it and the paywall disappears.

noname123 11y ago

Nassim Taleb buys options whose counterparty has multiple ways of hedging, Suppose Taleb buys a put on SPX (S&P500 index) from an counter-party with a strike price of 1880, most prudent counter-party would re-hedge themselves by spending some of Taleb's premium to buy a cheaper SPX at a strike price of 1800. Alternatively, the counterparty might put on dynamic hedge; meaning if SPX drops and it gets closer to Taleb's strike price, the Taleb counterparty will have to rush out and also short number of shares of SPX proportional to the option's pricing's sensitivity to the SPX, otherwise known as the delta of the option contract. Suppose the counterparty didn't hedge properly or the market was super-volatile like this week Monday and counterparty didn't act fast enough to hedge and is brankrupt; then usually the counterparty's broker has to steps in (e.g., Charles Schwab or TDAmeritrade for retail investors or a huge investment bank's brokerage services for a hedge fund). Suppose the trade is so huge that the broker defaults (e.g., when Swiss Franc de-pegged and blown up lots of retail forex accounts and forex brokers), each broker also has to go through a clearing broker who are the third-level of guarantor of the option contract; the two biggest one's for equity and options markets in US are Goldman Sachs Execution Services and Apex Clearing. Their sole job is to maintain a huge account of cash proportional to the trades they settle in case of settlement issues. Now suppose the GSEC and Apex defaults also; then I'm not sure anymore, I'm guessing that the guarantee responsibility falls upon the charter members of the option or equity exchange - the burden of debt is distributed to the member of the exchange (brokers, banks). If all the exchange collective members go bankrupt, then I guess at that point, that means collecting your option payment would be your least problem...

jgalt212 11y ago

How funny you should mention that. That's what Goldman did with AIG. AIG sold puts on basically the entire US housing market. GS, et al, were on the other side of this trade. If AIG couldn't pay off, effectively Goldman's house is burning down, but their fire insurance company (AIG) has just gone broke. That is, until the US Government bails out AIG (and by extension Goldman). GS has argued that they didn't need AIG b/c they were flat exposure to AIG. Technically, this may have been true, but unlikely. In any case, if AIG went under other folks who owed GS money would not be able to pay because AIG could not pay (and AIG owed everyone money). So really GS was very much tethered to AIG. But you do bring up a good point. It's very difficult to make money betting on the end of the world, because if the world ends, who will be around to pay you. For these reasons, central governments/banks have been the underwriter of end of the world insurance through their lender of last resort functionalities.