Dec 17, 2012
Volatility Views 73: Once More unto the Black Swan
Volatility Review: NASDAQ vol hits 13.08. Apple,
despite its tremendous movement, is having little effect on NASDAQ
volatility. S&P realized vol versus implied vol.
Mail: Back to Black Swans.
from Asymmetric Risk: According to Don, Nassim will lose money over
the long run because the out of the money options he buys have a
higher implied volatility than the close to the money options he
sells. Since he is paying a spread, Don thinks this is a bad
strategy. Far be it for me to disagree with Don, but speaking for
Nassim (and I feel confident speaking for Nassim because I've had
dozens of conversations with him on this exact topic) Nassim would
agree he is paying a spread but the spread between ATM and OTM
options is systemically underpriced. Nassim's strategy is based on
his belief that asset prices are not normally distributed -- the
bell is flatter and the tails are fatter. So options markets
overprice one standard deviation risk ("I always sell ATM
straddles") and underprice two standard deviation risk (Black
Swans). Your critique of him is misplaced because you're focusing
on 5- and 10-sigma events which are not required for his strategy
to work. He ran a large option book at a major investment bank and
was profitable on a monthly basis.
- Tweet from
Don M.: Shouldn't Nassim be a net buyer of tail puts if he
feels tail risk is underpriced? If he sells ATM, does he buy OTM on
a ratio? Make no sense to me.
- Email from
Tim Vicks, Fredericksburg, VA: Let me see if I have this
straight: Black Swans are extreme outlier events that are
unpredictable, yet so catastrophic as to alter the course of human
events. But the way to prepare for these events is to sell premium?
What am I missing?
Crystal Ball: Sebastian foresees a massive spike in
realized vol with little to no spike in implied vol. Is it time to
own gamma and be short vega? Still waiting for some news out of