Volatility Views 73: Once More unto the Black Swan Breach

Comment 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?