to me, that sounds more like Niederhoffer's strategy.
What screwed Niederhoffer wasn't that things didn't remain the same, it was that he became so confident in his strategy of selling out of the money options that he left the cozy positive expected return of the option seller or option MM to the negative expected return of the option buyer, he went naked. Selling naked options is similar to buying them in terms of expected returns (because the losses from naked selling are unbounded), sooner or later the negative expected return comes back to bite you on the ass, you lose everything and then some.
It is this tendency for complacency brought on by flawed risk models that Taleb tries to cash in on. Even after LTCM blew up, the smart guys behind it were still uttering phrases like 10 sigma event, they didn't imagine that their model was flawed and what took them down wasn't a 10 sigma event at all but one which had a much higher probability.
i don't know either, but if i had to guess i'd say it was a lifestyle choice. as a famous author, i doubt he had trouble attracting capital.
Like most contrarians he worried about attracting too much capital and fame as much as he worried about not attracting enough capital.
i'm not "denigrating" his strategy. i agree with Taleb that the market under prices kurtosis. i also agree with his observation (really Kahneman & Tversky's observation) that most people are biased towards loss aversion. these two factors work in Taleb's favor and i think make his strategy intriguing.
His model can only be judged by it's fitness not by one possible outcome, that was my only point and his throughout the book. The big question to answer is: Is it possible to determine if OOTM options are under-priced based on his probability models? His contention is that buying out of the money options has an expected positive return whereas most quants will tell you that buying options has a negative expected return, with out of the money options even more so. Certainly someone who understands and employs probability models like he does would not engage a strategy that he knew had a negative expected return, so one would have to assume that he was testing is the hypothesis that the house always wins....eventually.
Maybe he reached his stop loss, the limit where a trader changes his mind. He might have discovered, empirically no less, that he was wrong. |
