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I think the thesis of this type of trading is that black swan events are underestimated in the market, making far out-of-the-money options (i.e. insurance again
by throwphoton 6y ago
I think the thesis of this type of trading is that black swan events are underestimated in the market, making far out-of-the-money options (i.e. insurance against unlikely events) sufficiently cheap that you can make money in the long run even if you lose money on 99.9% of days.
- celticninja 6y agoThis is an extension of 'the market can remain irrational longer than you can remain liquid'. You could make money in the long run if you have the funds to get there. If we consider that this and the 2008 crisis were black swan events, then we could expect them to occur perhaps once a decade, which from now could be up to 20 years for the next one. By the end of that 20 year period the amount you have remaining to bet on the black swan event would be severely limited by the preceding 2 decades.
- deleted 6y ago[deleted]
- valuearb 6y agoIf you aren’t leveraged, it’s trivial to ride out crashes. Why drag your returns down with expensive insurance?
- nakedshorts 6y agoYes, Taleb's entire life work is premised on the fact that people's mental models of probability distributions are not fat-tailed enough to match reality. He believes that such strategies should be positive in expectation (aka, should make money over the long run).
- chosenbreed37 6y agoI'd say it's even more basic than that. What I take from it is how to avoid ruin and potentially profit from the tail event. I don't see it as a means of increasing wealth even though it can have that effect. It's about preservation first and foremost.
- chillacy 6y agoThe term I've heard used is Kurtosis Risk: https://en.wikipedia.org/wiki/Kurtosis_risk https://en.wikipedia.org/wiki/Kurtosis_risk