A few years ago I did a bit of research for a column looking at the idea of buying far-out-of-the-money options in the hopes of some time, perhaps not for many years, capturing a huge, unexpected rally in something. I thought that most years you’d lose your money, but perhaps once in 10 or 20 years you’d make so much it would be worth it.
I spoke to a few traders and most of them thought it sounded like a bad idea, that almost every year you’d lose all your money on the premium and never be exercising anything. That was back in the day when volatility was very low, measured by something called VIX, and out-of-the-money options could be bought pretty cheap.
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Well, as most farmers know, a couple of years ago ag commodities began soaring higher than anyone expected. Which made me wish I’d put some money into buying way-out-of-the-money call options on wheat, canola, soybean, corn, whatever. Would have gotten rich, rich, rich.
But now, with VIX way high, option premiums are very expensive, and even far-out-of-the-money options are costly, so it isn’t really possible now to cheaply purchase them in the distant hope of sometime catching a rally.Â
This came to my mind the other day when I was watching Bloomberg TV, and an item reported that Nassim Nicolas Taleb’s “Black Swan” fund had made its holders a lot of money this year, while most of the rest of the world fell down. Taleb’s book about the “Black Swan” argues that very improbable events are always dominating our world, so one should plan for them to occur, without trying to predict what they will be. He is an options trader who made piles of money by banking on weird things happening, and set up this Black Swan fund to take advantage of sudden unpredictable swings in the market.
Wish I’d read the book a few years ago . . .Â
Anyone have a knob that can be turned to reverse the flow of time?
