Forget Empirica, say hello to Universa! Felix alerts me to this interesting little gemlet. Taleb, whose thoughts have provided a deal of material for this site, is back trading, or well, sort of not actually, with a new fund. Is it me, or do Taleb’s fund launches seem to coincide with his books? Another interesting take on the story here, from what seems like a (possibly ex-?) fund selector’s view.
The WSJ article spends some time discussing the main activity of Empirica, which was buying long dated out of the money options which should, if you know the arguments of the books, be mispriced. Not much new there. What caught my eye here was rather this:
To generate short-term returns during times of low volatility, he also sells options very close to the current price of a security. Such options are pricier, since the odds that they will be cashed in are greater. They also can be risky for the seller during times of moderate volatility, when the underlying shares are more likely to punch through the strike price.
Uh?! What the fuck?! Did I completely misunderstand the whole book? Taleb endorses the writing of options at times of “low volatility”? How does this allow us to benefit from a Black Swan? How does this differentiate from a Niederhoffer-like approach? How in the world between Mediocristan and Extremistan can we have any idea whether we are in a time of low volatility or not? Is it the combination of writing close to the money options and buying well-out of the money ones that produces a secret sauce? Clearly, he is trying to make money out of the standard “low volatility” world we are supposed to live in — according to everyone else, but if he hits a black swan, I would have thought his unlimited losses on one of these sold options wipe out any money he makes on the long dated ones he owns. I think this is what Mahalanobis in the link above is going on about when he talks about gamma and vega positioning. Wouldn’t it have been good to introduce this er, minor wrinkle into the book itself? I feel a bit like I have been taken for a ride. It’s sort of like a committed communist finding out Karl Marx owned a sweatshop. This is a complete non-sequitur for me.