Bumper sticker essay

In fact, Mandelbrot also argues for this strategy.  Taleb co-authored a paper arguing that most people systematically underestimate volatility. Furthermore, he argues there exists not only a lack of appreciation of fat tails, but a preference for positive skew , in that people prefer assets that jump up, not down, which would imply the superiority of buying out-of-the-money puts as opposed to calls because those negative tails that increase the price of puts are is affiliate with some fund that tend to be long tail risk, presumably by being long deep out-of-the-money options, but selling at-the-money options, a locally delta and vega neutral strategy.

These assertions present some straightforward tests, which a Popperian like Taleb should embrace. Specifically, buying out-of-the-money options, especially puts (because of negative skew), should, on average, make money. But insurance companies, which basically are selling out-of-the-money options, tend to do as well as any industry (Warren Buffet has always favored insurance companies, especially re-insurers, as equity investments). Studies by Shumway and Coval (2001) and Bondarenko (2003) have documented that selling puts is where all the extranormal profit seems to be. Of all the option strategies, selling, not buying, out-of-the-money puts has been the best performer historically. Further, Sophie Ni finds that out-of-the-money options are more overexpensive the degree they are out-of-the-money.

Bumper sticker essay

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