Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Fri May 22, 2020 12:02 pm

Suppose you want do hedge for risk as Universa Investments L.P. does, but you are a retail investor. Can you do it yourself easily? How?
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

User avatar
Forester
Posts: 1165
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by Forester » Fri May 22, 2020 12:41 pm

Google Patrick Ceresna, I think he has a (paid?) educational series on it, maybe on Youtube also.

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 12:46 am

steve321 wrote:
Fri May 22, 2020 12:02 pm
Suppose you want do hedge for risk as Universa Investments L.P. does, but you are a retail investor. Can you do it yourself easily? How?
You can start with far out-of-the-money (SPX) puts. There is obviously a lot more going on with the private tail hedge strategy, but this is the anchor position that a retail investor would start with.

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sat May 23, 2020 1:32 am

BJJ_GUY wrote:
Sat May 23, 2020 12:46 am
steve321 wrote:
Fri May 22, 2020 12:02 pm
Suppose you want do hedge for risk as Universa Investments L.P. does, but you are a retail investor. Can you do it yourself easily? How?
You can start with far out-of-the-money (SPX) puts. There is obviously a lot more going on with the private tail hedge strategy, but this is the anchor position that a retail investor would start with.
Thanks. I don't know anything about them but started Googling them. Just one practical question. Can you buy these puts on their own, or do you have to buy them at the same time as you buy an index fund or ETF? I mean, since they give you the possibility of selling SPX at a given price, I guess you have to own SPX when buying the puts? Or can you buy SPX later? For example, the S&P is 2995, can I buy a put on its own, giving me the right to sell it at 2800 in a month? Then if in a month it's at 2500, I can buy it at 2500 and then immediately sell it at 2800 using my put option. Is that a possible scenario or is what I said nonsense? :confused Never looked into options before.
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 2:36 am

steve321 wrote:
Sat May 23, 2020 1:32 am
BJJ_GUY wrote:
Sat May 23, 2020 12:46 am
steve321 wrote:
Fri May 22, 2020 12:02 pm
Suppose you want do hedge for risk as Universa Investments L.P. does, but you are a retail investor. Can you do it yourself easily? How?
You can start with far out-of-the-money (SPX) puts. There is obviously a lot more going on with the private tail hedge strategy, but this is the anchor position that a retail investor would start with.
Thanks. I don't know anything about them but started Googling them. Just one practical question. Can you buy these puts on their own, or do you have to buy them at the same time as you buy an index fund or ETF? I mean, since they give you the possibility of selling SPX at a given price, I guess you have to own SPX when buying the puts? Or can you buy SPX later? For example, the S&P is 2995, can I buy a put on its own, giving me the right to sell it at 2800 in a month? Then if in a month it's at 2500, I can buy it at 2500 and then immediately sell it at 2800 using my put option. Is that a possible scenario or is what I said nonsense? :confused Never looked into options before.
SPX options are cash settled, so no need to own the underlying.

bgf
Posts: 1483
Joined: Fri Nov 10, 2017 9:35 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by bgf » Sat May 23, 2020 6:12 am

Even far OTM puts are going to be expensive. This is a popular idea these days and volatility increases option prices. His books make it sound like this kind of thing is cheap, but it isn't.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 7:07 am

bgf wrote:
Sat May 23, 2020 6:12 am
Even far OTM puts are going to be expensive. This is a popular idea these days and volatility increases option prices. His books make it sound like this kind of thing is cheap, but it isn't.
Agreed.

And when you think about the other moving parts that Universa and strategies employ -- selling ATM options to fund the OTM buying -- there is suddenly more at stake than just the premiums from elevated implied vols on OTM puts and VIX calls etc. Better understand margin and what it means (and $ it takes) to maintain the desired notional exposure if the volatility markets move against you in the interim.

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sat May 23, 2020 7:10 am

BJJ_GUY wrote:
Sat May 23, 2020 7:07 am
bgf wrote:
Sat May 23, 2020 6:12 am
Even far OTM puts are going to be expensive. This is a popular idea these days and volatility increases option prices. His books make it sound like this kind of thing is cheap, but it isn't.
Agreed.

And when you think about the other moving parts that Universa and strategies employ -- selling ATM options to fund the OTM buying -- there is suddenly more at stake than just the premiums from elevated implied vols on OTM puts and VIX calls etc. Better understand margin and what it means (and $ it takes) to maintain the desired notional exposure if the volatility markets move against you in the interim.
hadn't seen this post (replied in the other thread on Taleb). All this sounds pretty complicated for retails investors...
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 7:16 am

steve321 wrote:
Sat May 23, 2020 7:10 am
BJJ_GUY wrote:
Sat May 23, 2020 7:07 am
bgf wrote:
Sat May 23, 2020 6:12 am
Even far OTM puts are going to be expensive. This is a popular idea these days and volatility increases option prices. His books make it sound like this kind of thing is cheap, but it isn't.
Agreed.

And when you think about the other moving parts that Universa and strategies employ -- selling ATM options to fund the OTM buying -- there is suddenly more at stake than just the premiums from elevated implied vols on OTM puts and VIX calls etc. Better understand margin and what it means (and $ it takes) to maintain the desired notional exposure if the volatility markets move against you in the interim.
hadn't seen this post (replied in the other thread on Taleb). All this sounds pretty complicated for retails investors...
I don't think retail investors should even try. Answering the original question for intellectual curiosity, not as something I'd ever suggest in practice.

bgf
Posts: 1483
Joined: Fri Nov 10, 2017 9:35 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by bgf » Sat May 23, 2020 7:17 am

steve321 wrote:
Sat May 23, 2020 7:10 am
BJJ_GUY wrote:
Sat May 23, 2020 7:07 am
bgf wrote:
Sat May 23, 2020 6:12 am
Even far OTM puts are going to be expensive. This is a popular idea these days and volatility increases option prices. His books make it sound like this kind of thing is cheap, but it isn't.
Agreed.

And when you think about the other moving parts that Universa and strategies employ -- selling ATM options to fund the OTM buying -- there is suddenly more at stake than just the premiums from elevated implied vols on OTM puts and VIX calls etc. Better understand margin and what it means (and $ it takes) to maintain the desired notional exposure if the volatility markets move against you in the interim.
hadn't seen this post (replied in the other thread on Taleb). All this sounds pretty complicated for retails investors...
Many people are familiar with Talebs popular works but not his more technical book Dynamic Hedging.

Take a peak...

https://www.amazon.com/Dynamic-Hedging- ... 0471152803
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 12:38 pm

bgf wrote:
Sat May 23, 2020 7:17 am
Many people are familiar with Talebs popular works but not his more technical book Dynamic Hedging.

Take a peak...

https://www.amazon.com/Dynamic-Hedging- ... 0471152803
Ha. I remember reading that. Definitely not a fun read like his others (and probably only worth it for people looking for something more like a text book).

User avatar
Horton
Posts: 559
Joined: Mon Jan 21, 2008 3:53 pm

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by Horton » Sat May 23, 2020 1:39 pm

No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sat May 23, 2020 1:42 pm

Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

columbia
Posts: 2595
Joined: Tue Aug 27, 2013 5:30 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by columbia » Sat May 23, 2020 1:45 pm

steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
If you leave your head in the sand for too long, you might get run over by a Jeep.

User avatar
Horton
Posts: 559
Joined: Mon Jan 21, 2008 3:53 pm

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by Horton » Sat May 23, 2020 1:49 pm

steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
Billionaires can do a lot of things I can’t. I’m doing well with my (rather) simple strategy.

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sat May 23, 2020 1:57 pm

columbia wrote:
Sat May 23, 2020 1:45 pm
steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
both things are correct but I posted this thread precisely to see if I could learn. Please correct me if I am wrong, but I understood that one of the purposes of this website is to educate people about finance, so that they can learn to do things that they don't yet know how to do.
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

bgf
Posts: 1483
Joined: Fri Nov 10, 2017 9:35 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by bgf » Sat May 23, 2020 1:57 pm

BJJ_GUY wrote:
Sat May 23, 2020 12:38 pm
bgf wrote:
Sat May 23, 2020 7:17 am
Many people are familiar with Talebs popular works but not his more technical book Dynamic Hedging.

Take a peak...

https://www.amazon.com/Dynamic-Hedging- ... 0471152803
Ha. I remember reading that. Definitely not a fun read like his others (and probably only worth it for people looking for something more like a text book).
You're better than I. After reading Talebs popular works I took a peak at that one, immediately realized it was beyond my capabilities and that was that.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

columbia
Posts: 2595
Joined: Tue Aug 27, 2013 5:30 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by columbia » Sat May 23, 2020 1:59 pm

steve321 wrote:
Sat May 23, 2020 1:57 pm
columbia wrote:
Sat May 23, 2020 1:45 pm
steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
both things are correct but I posted this thread precisely to see if I could learn. Please correct me if I am wrong, but I understood that one of the purposes of this website is to educate people about finance, so that they can learn to do things that they don't yet know how to do.
Understood. I’m just not sure this particular web forum is the place to pose the question.
If you leave your head in the sand for too long, you might get run over by a Jeep.

BJJ_GUY
Posts: 223
Joined: Wed Mar 13, 2019 7:45 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by BJJ_GUY » Sat May 23, 2020 2:35 pm

steve321 wrote:
Sat May 23, 2020 1:57 pm
columbia wrote:
Sat May 23, 2020 1:45 pm
steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
both things are correct but I posted this thread precisely to see if I could learn. Please correct me if I am wrong, but I understood that one of the purposes of this website is to educate people about finance, so that they can learn to do things that they don't yet know how to do.
Seems fitting to me. A ton of posts are about various defensive assets that might pair with equities. Contemplating volatility trading strategies is offered in mutual fund form, so probably a good idea to understand the nuances that differentiate tail hedging vs other options trading strategies. More interesting to dissect what some less-than-transparent funds do than another debate about gold, commodities, or CDs in an allocation mix!

User avatar
JoMoney
Posts: 9258
Joined: Tue Jul 23, 2013 5:31 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by JoMoney » Sun May 24, 2020 7:54 am

Probably not, at least according to them there's something proprietary going on there that did better than competing strategies:
https://www.institutionalinvestor.com/a ... -Right-Now
...In March, the Standard & Poor’s 500 stock index lost 26.2 percent at its lowest point, and had declined 12.4 percent as of the end of the month. Since the end of 2019, Universa’s hypothetical portfolio had a CAGR of 16.2 percent, compared with the S&P 500’s return of 4.5 percent. The portfolio has produced a CAGR of 11.5 percent since inception in March 2008.
...
Universa also crunched the numbers on other hypothetical portfolios, using different hedges. A portfolio made up of a 3.33 percent allocation to the CBOE Eurekahedge Tail Risk index, for example, and a 96.67 percent allocation to the S&P 500 lost 11.4 percent in March and has gained 5.2 percent since the end of 2019. Other sample portfolios showed the returns using hedges such as the CBOE Eurekahedge Long Volatility index, gold, the CTA index, and traditional fixed income. Investors using Universa’s tail hedge beat all of them. ...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sun May 24, 2020 8:05 am

JoMoney wrote:
Sun May 24, 2020 7:54 am
Probably not, at least according to them there's something proprietary going on there that did better than competing strategies:
https://www.institutionalinvestor.com/a ... -Right-Now
...In March, the Standard & Poor’s 500 stock index lost 26.2 percent at its lowest point, and had declined 12.4 percent as of the end of the month. Since the end of 2019, Universa’s hypothetical portfolio had a CAGR of 16.2 percent, compared with the S&P 500’s return of 4.5 percent. The portfolio has produced a CAGR of 11.5 percent since inception in March 2008.
...
Universa also crunched the numbers on other hypothetical portfolios, using different hedges. A portfolio made up of a 3.33 percent allocation to the CBOE Eurekahedge Tail Risk index, for example, and a 96.67 percent allocation to the S&P 500 lost 11.4 percent in March and has gained 5.2 percent since the end of 2019. Other sample portfolios showed the returns using hedges such as the CBOE Eurekahedge Long Volatility index, gold, the CTA index, and traditional fixed income. Investors using Universa’s tail hedge beat all of them. ...
yes exactly, even Asness admitted that here: https://twitter.com/CliffordAsness/stat ... 3747702785
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

Beehave
Posts: 666
Joined: Mon Jun 19, 2017 12:46 pm

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by Beehave » Sun May 24, 2020 2:18 pm

steve321 wrote:
Sun May 24, 2020 8:05 am
JoMoney wrote:
Sun May 24, 2020 7:54 am
Probably not, at least according to them there's something proprietary going on there that did better than competing strategies:
https://www.institutionalinvestor.com/a ... -Right-Now
...In March, the Standard & Poor’s 500 stock index lost 26.2 percent at its lowest point, and had declined 12.4 percent as of the end of the month. Since the end of 2019, Universa’s hypothetical portfolio had a CAGR of 16.2 percent, compared with the S&P 500’s return of 4.5 percent. The portfolio has produced a CAGR of 11.5 percent since inception in March 2008.
...
Universa also crunched the numbers on other hypothetical portfolios, using different hedges. A portfolio made up of a 3.33 percent allocation to the CBOE Eurekahedge Tail Risk index, for example, and a 96.67 percent allocation to the S&P 500 lost 11.4 percent in March and has gained 5.2 percent since the end of 2019. Other sample portfolios showed the returns using hedges such as the CBOE Eurekahedge Long Volatility index, gold, the CTA index, and traditional fixed income. Investors using Universa’s tail hedge beat all of them. ...
yes exactly, even Asness admitted that here: https://twitter.com/CliffordAsness/stat ... 3747702785
I took a look at the Tale-Asness tweet storm because of another boglehead string and then watched a couple of Taleb's videos (because the tweets themselves are essentially invective bombs with near-zero intellectual value). Here's what I gleaned from Taleb's videos and an article or two.

(1) Universa publishes it's backward looking successful CAGR (compared to S&P 500) starting from March 2008 (if I recall) and ending "today" which happens to be a time period that exactly bookends two major dips that highly favor the Universa mode of operation. While it is true that the begin point goes back as far as the actual existence of Universa, it is also true that the duration of the compared period in which Universa has approx 11.4% growth vs. 8.4% (these are from my memory and close but not exact to their published numbers) shows that the two home runs in 12 years had a costly dry spell in between. It is not at all clear that extrapolations over other time periods would show Universa-type performance to be an out-performer (or possibly not even efficient). Moreover, if more people try to follow the Universa-type put-option purchase strategy, the options might become more costly, further eroding the desirability of the method.

(2) Taleb discusses a model involving some number of variables with which he develops his curve, and then the integral calculus he uses to determine how fat the tail risks for variations greater than some number of standard deviations (I think it was three) is.

(3) It appears to me that he touts the mathematical analysis of the fat-tail as his secret sauce, but this seems fairly standard fare for those accomplished in the art, and the real issue is what those magic variables are that he uses to determine the shape of the curve he analyzes. I saw nothing indicating an answer to this -- again, I had no expertise at all with Taleb or Asness before looking at the tweet storm.

(4) My personal take on the fat-tail disaster issue is that there are natural disasters and human-made disasters. Natural disasters occur at some semi-random but "constant-over-time" rate, whereas human disruptions occur based on human nature plus human technology, where human technology both increases in speed and scope over time. The upshot is that Taleb's idea that disasters (black swans) happen more frequently than "commonly thought" is probably simply a function of technology enabling bigger bundling and better evasions of regulations, borders, etc. So if Taleb is right, it's not at all a function of mathematical insight, it is within a model that is probably constructed on common sense.

My opinion. I have no particular expertise in finance. However, I have worked as a subject matter expert with top researcher mathematicians on other performance of other types of systems, and this looks very familiar to me. Recognition of how the world works is the foundation for exotic mathematical modeling. Maybe Taleb has this all together himself, but at its heart, it's not the exotic math that's the secret sauce, it's which variables you choose and what their nature is that is the foundation. Perhaps Taleb reveals his variables somewhere, I did not see it in my admittedly cursory search.

My suspicion is that over general time periods, conscientious rebalancing to mitigate risk probably works as well as any barbelling effort. Best wishes to all.

columbia
Posts: 2595
Joined: Tue Aug 27, 2013 5:30 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by columbia » Sun May 24, 2020 2:46 pm

steve321 wrote:
Sat May 23, 2020 1:57 pm
columbia wrote:
Sat May 23, 2020 1:45 pm
steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
both things are correct but I posted this thread precisely to see if I could learn. Please correct me if I am wrong, but I understood that one of the purposes of this website is to educate people about finance, so that they can learn to do things that they don't yet know how to do.
I bumped this thread. I have no idea if it’s close to what you’re looking for, however...

viewtopic.php?f=10&t=263557
If you leave your head in the sand for too long, you might get run over by a Jeep.

rich126
Posts: 1444
Joined: Thu Mar 01, 2018 4:56 pm

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by rich126 » Sun May 24, 2020 3:01 pm

The cheap time to hedge with options is when the market seems to be going good but people either don’t want to give up returns at that time or don’t believe the market will go down. Once things go bad they cost much more and you may be better just holding extra cash.

When the vix is low around 10 options are cheap. So you buy them a year or more out at 15-20% below the index price.

Like anything in life people ignore things until an emergency hits and then it is too late. Not saying whether hedging is good but you are late to the party.

User avatar
Topic Author
steve321
Posts: 345
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by steve321 » Sun May 24, 2020 3:25 pm

columbia wrote:
Sun May 24, 2020 2:46 pm
steve321 wrote:
Sat May 23, 2020 1:57 pm
columbia wrote:
Sat May 23, 2020 1:45 pm
steve321 wrote:
Sat May 23, 2020 1:42 pm
Horton wrote:
Sat May 23, 2020 1:39 pm
No offense, but if you are posting the question on this forum, then it’s best to admit you are way out of your league and focus on the basics.

Why swing for the fences when singles and walks will get the job done?
Why? Why should you want (or have the right) to mitigate risk if you are a biliionaire, but not if you are 'only' a millionaire??
The reasonable assumption is that you neither know how to do it - hence vis thread - nor have enough money to pay the people who *might* do it successfully.

(I fall in both of those categories.)
both things are correct but I posted this thread precisely to see if I could learn. Please correct me if I am wrong, but I understood that one of the purposes of this website is to educate people about finance, so that they can learn to do things that they don't yet know how to do.
I bumped this thread. I have no idea if it’s close to what you’re looking for, however...

viewtopic.php?f=10&t=263557
That looks interesting thank you. As a Uk investor i'm not sure about things like tax implications etc but I'll certainly look into it.
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde

mjb
Posts: 170
Joined: Sat Nov 30, 2013 11:43 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by mjb » Sun May 24, 2020 5:05 pm

It seems that all Taken actually does is treat 3,4,5, and 6 STD from the mean and assumes that each event can happen if each had a probably of 1%. This is a standard technique in some engineering circles. For instance, on the nuclear industry, by law anything must survive a 12 sigma (6 from the mean event) but normal conditions are evaluated for both an average condition and 6 sigma events (3 sigma from the mean).

This method with leaps would result on 2-4% in otm puts at prices for 20, 25, 30 and 40% declines.

However, it seems like an easier strategy with today's cheap margin rates would be just leverage 10% on the total market etf at fixed drawdowns up to a total of 50 or so. For instance, leverage 10 percent at 25, 35, and 35% drawdowns. This would still leave plenty of room before a margin call. Then set all future contributions to pay off the margin if the share price is above what was paid or buy shares if the price is below what was paid for margin.

This would have no drag from option costs and would not have leverage (or very little) at market peaks assuming future contributions and dividends went to paying off margin.

Additionally, if many investors did this, there would be a counter cyclical buffering effect against large crashes. I.E. an antifragile property.

Note that this only works in a ZIRP world or other instance where margin interest is equal or less than projected inflation.

User avatar
cos
Posts: 113
Joined: Fri Aug 23, 2019 7:34 pm
Location: Boston
Contact:

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by cos » Sun May 24, 2020 6:06 pm

I believe allocating a portion of one's portfolio toward the Amplify BlackSwan Growth & Treasury Core ETF (SWAN) is a very easy and fairly efficient way to implement Taleb's risk mitigation strategy. There's already a thread on it: viewtopic.php?f=10&t=263557

mjb
Posts: 170
Joined: Sat Nov 30, 2013 11:43 am

Re: Can Taleb's risk mitigation strategy be implemented by retail investors (if so how)?

Post by mjb » Mon May 25, 2020 11:52 am

SWAN is rather different. It is 90% treasuries and 10% ITM options.

Taleb's approach was >95% stocks and the rest downside protection options.

Post Reply