Random Walks and Random Jumps: Taleb on Volatility
Nassim Nicholas Taleb, author of the widely discussed The Black Swan and Fooled By Randomness, is out with a new paper. “The Fourth Quadrant: A Map of the Limits of Statistics”pursues a thesis very familiar to his readers, namely that economistsand finance professionals put society at risk by offering false comfortin the form of statistical models.
Risk Does Not Equal Volatility
Now that the low-volume summer blahs are (probably) over, maybe we’ll see some genuine premium hitting the options boards for the rest of the year, rather than being concentrated only in energy and commodities. So we wondered, would there be any edge in taking directional trades based solely on extreme volatility readings? Or more precisely:
Shorting the stock doesn’t seem all that attractive an option here. If Lehman proves that their assurances actually have some merit, the stock could snap right back to the 40-45 level. Instead, we want to take advantage of the monstrous volatility that has been priced into the near-dated options...