On the other hand, many of us are well-versed at going over a prospectus and Jim Grant of the Interest Rate Observer has put one together for the United States of America as it seeks to raise $16Bn for 30-year Treasury Notes. According to the prospectus: “The Bonds will mature on April 15, 2040. Interest on the bonds is payable semiannually on April 15 and October 15, beginning October 15, 2010. Before giving effect to the offering of the Bonds and the securities to be issued concurrently,
the United States had approximately $12,500,000,000,000 of indebtedness subject to the statutory debt limitation.”
Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”
In a beautiful passage from Les Miserables,Hugo speculates that Napoleon at Waterloo might be compared to a race horse that was crippled who we all feel great sorrow and compassion for. Contrast this to the envy and loathing that we tend to feel when a rich man loses his fortune especially in the market. One notes a middle response to Tiger Woods missing his third cut in a row in a major tournament. There is empathy because he is a personage of color, but an opposite because he was not a man of faith?
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable.Continue reading »