Nassim Taleb / Universa Investments

[blid2def]

I don't mind betting on black swans as long as the bet is funded by other areas with a much high probability of success. For example, you have 4 options positions opened with credit and with 75% or higher probability of success. That provides an opportunity to leverage and have a small wager on a longshot position. I think the black swan bet doesn't even have to be a LEAP - just far out enough to allow it a bit more time to happen. If the black swan bet is far out enough, you don't even have to keep adding to the bets (i.e. you can use a month's earnings to fund 3 to 6 months' bets).

Of course, the risk is that the funding positions fail... However, if those credit positions were limited loss positions, then you end up with the worst case being that you lose a little bit more than usual if the black swan bet also fails (most likely), and the best case being that the black swan bet mitigates the loss.

Since a black swan bet is a gamble, my assumption is that one uses a limited loss, unlimited profit strategy on these bets.

[kennynah]

I don't mind betting on black swans as long as the bet is funded by other areas with a much high probability of success. For example, you have 4 options positions opened with credit and with 75% or higher probability of success. That provides an opportunity to leverage and have a small wager on a longshot position. I think the black swan bet doesn't even have to be a LEAP - just far out enough to allow it a bit more time to happen. If the black swan bet is far out enough, you don't even have to keep adding to the bets (i.e. you can use a month's earnings to fund 3 to 6 months' bets).

Of course, the risk is that the funding positions fail... However, if those credit positions were limited loss positions, then you end up with the worst case being that you lose a little bit more than usual if the black swan bet also fails (most likely), and the best case being that the black swan bet mitigates the loss.

great idea !!!!

reason for suggesting LEAPs is smaller per unit theta, very long time for that toto to kana...this is like, SOP instructions to the bookie...buy this same number, sat/sun/wed...dont stop until i tell u...every month you collect money from me (theta) if no kana...if kana...stop buying and pay me.....

and along the way, if the feel is not there anymore, still got meaningful the salvage value...

Since a black swan bet is a gamble, my assumption is that one uses a limited loss, unlimited profit strategy on these bets.

totally in sync with you here...such as Long OTM Call or Long OTM Put with sub 0.1 delta...cheaper..

any other option methods?

[winston]

I think we need to keep Black Swan events in perspective. They have a very small probability of happening.

Therefore, if you are long stocks, it does not hurt to buy an OTM Put Option. If a Black Swan happen, then you have some insurance.

However, to bet blindly and buy OTM options everymonth while you keep the rest of the portfolio in Cash is not meaningful.

And vice-versa. If your portfolio is net short, then it does not hurt to buy an OTM Call Option in case a Black Swan happens..

[kennynah]

w : i changed the angle earlier from looking at black swans as being a negative event that will hurt an investor's portfolio, into one that I/T can take advantage of such remote events from happening...ie to say, we wana profit from such remote black swan events...
knn...this black swan event keep happening...boss (GR)...see the special characters...

as such, there were suggestions that very long dated far OTM put or call opti<textarea name="message" id="message" rows="15" cols="76" tabindex="3" onselect="storeCaret(this);" onclick="storeCaret(this);" onkeyup="storeCaret(this);" class="inputbox">w : i changed the angle earlier from looking at black swans as being a negative event that will hurt an investor's portfolio, into one that I/T can take advantage of such remote events from happening...ie to say, we wana profit from such remote black swan events...

as such, there were suggestions that very long dated far OTM put or call options could be purchased to capture these "outlier" events...

since such black swan events have a very small chance of occurring, it makes sense that only far OTM options are purchased, becos they correspond in likeness low probability of ever becoming ITM....hence a delta of <0.1 options are the ones to purchase..

so say....if one believes one the US banks will go kaput in the next 12-15months...and one is willing to bet on this occurring, then Long Apr 2010 $2.50 Put, when this identified bank could now be $20.... this 15 months Long Put will likely have a delta of <0.1 and would not be too pricey....but there's still a premium to pay of cos...lau goh's word of wisdom applies here...bo free lunch one..... just like we pay $10/month to NTUC for some whatever medical coverage/accident insurance.... small price and long long time must pay (equal to those long dated options)......but if ever pays out (option gets ITM)...will be substantial amount...

[blid2def]

K, I can see the problem happened again... But unique to you leh so far. I really think maybe it's an add-on you have...

[winston]

w : i changed the angle earlier from looking at black swans as being a negative event that will hurt an investor's portfolio, into one that I/T can take advantage of such remote events from happening...ie to say, we wana profit from such remote black swan events......

As mentioned by 802, isn't it better to let the Black Swan event happen first and then bet big on it? I think that is a better strategy than betting small with the chance that it will not happen. Of course, you may miss the first 10mins of the event but may still capture the rest.

Hmmm.... do they go from zero to 200 km/hour in a short while ?

The only time I would buy a very OTM Option or Long Term Option is for Sensory Acuity purpose. Once I have a position, no matter how small, I would start focussing on it. Else I would be distracted by other news and other info..

[kennynah]

oh..i missed that one out... thanks.

somehow, i dont see how reacting after the event can be classified as having captured the black swan event....ie. suppose company X traded at $10 earlier, for whatever reasons, rose $100 dollar on market opening, this could be that black swan and the opportunity is lost .. so, taking a position as an after-the-fact is, then to me, normal trading/investment principal will apply.

[b0rderc0llie]

IHowever, to bet blindly and buy OTM options everymonth while you keep the rest of the portfolio in Cash is not meaningful.

Hehe, that's how Taleb's portfolio looks like. He seems to be doing well for now

[Poles]

w : i changed the angle earlier from looking at black swans as being a negative event that will hurt an investor's portfolio, into one that I/T can take advantage of such remote events from happening...ie to say, we wana profit from such remote black swan events......

As mentioned by 802, isn't it better to let the Black Swan event happen first and then bet big on it? I think that is a better strategy than betting small with the chance that it will not happen. Of course, you may miss the first 10mins of the event but may still capture the rest.

Hmmm.... do they go from zero to 200 km/hour in a short while ?

The only time I would buy a very OTM Option or Long Term Option is for Sensory Acuity purpose. Once I have a position, no matter how small, I would start focussing on it. Else I would be distracted by other news and other info..

all were white.....only turn black after event passed.......sometimes is HS theory....eg: the stockist who carry tons of 3M mask during SARS period.....

[kennynah]

like i said...an after the fact is pointless... like me saying... on the day before leh tanked $30...should have long $5 strike put... got meaning meh? we dont make money after the event has occurred....after the event...call it black swan, grey geese, yellow cheese, gao sai...what ever... it's a waste of breath talking abt it... except to impress the girls at bars u wana bed