The Not So Pleasant Ending to the Pleasant Life of a Turkey

November in Chicago has been nothing but normal, with 60 degree weather days (thanks to one of the strongest El Ninos on record) as we prepare ourselves for the most important food holiday of the year, Thanksgiving.

What you eat as a side dish depends greatly upon what region of the country you live, as FiveThirtyEight suggests. But despite the deviled eggs, squash, cornbread, or mac & cheese, no platter of food is more important than that of the turkey.

Each year, we’re reminded of the lovely chart of the life of said turkey from Nassim Taleb’s wonderful book, The Black Swan.

Taleb’s depicts “the good life” of a turkey, including round the clock care, all the food it can muster, developing a life of self-satisfaction, just so us humans can prepare the unfortunate creature for the not so pleasant surprise ending. The Turkey Surprise.

Now we’re not trying to lend advice on your eating habits, but can’t help but use this example in the investment realm. While it seems impossible to imagine this chart could be a stock market index tomorrow, next week, or next month – this chart is to remind those caught in stock market dream that anything could happen, at any moment, without notice; especially those selling volatility for a living.

Which brings us back to Mr. Turkey. The turkey sees 1000 days of small gains followed by one day of large losses, and we can’t help but think that reminds us of people who don’t do their due diligence for the right options managers in the alternative space.

The reason is option sellers are technically short volatility programs which on the whole make a living by risking a large amount to make a small amount. They have a large winning percentage where the large losses are very rare. If you’re a professional options trader, you know this sort of thing is going to happen, and prepare for it, by applying risk metrics developed to ensure that when the volatility hits, you enter a short drawdown, rather than being forced to shut down.

Now, professional option selling managers design their programs not to lose everything on a single day like the turkey; but they are betting against the occurrence of such a day, being set up to realize frequent but small gains in exchange for the risk of infrequent but very large losses (making them perhaps a distant cousin to the turkey).

In the meantime, Happy Thanksgiving to you and yours from the RCM Alternatives Team.

 

 

2 comments

  1. Great Article. The main point about risk is why I use the underlying futures as a hedge against premium.

  2. Two observations.

    First, tasty species never go extinct. Good for their genes. Also a fair tradeoff – a pleasant life and swift end, versus constant, terror-ridden painful struggle to survive in brutal nature.

    Most proffered “black swans” are, upon consideration, not. Consider an operation with three independent safety mechanisms, each 99% reliable. The risk all three fail is one in a million. Except that they are all maintained by the same ill-prepared, understaffed crew.
    All too often, it is we who miss the unrecognized correlation.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.