White swans do not exist

We have heard of many single-day-crashes in stock market history.

  • Black Thursday 1929
  • Black Monday 1929
  • Black Wednesday 1929
  • Black Monday 1987
  • September 16, 2008.

But there are no opposites for this phenomena. There is not a single day in which the Dow gained 500 points.

So it seems like all swans are Black. They can only hurt but cannot make us rich.

This is why far out of the money puts are slightly overpriced in a way far out of the money calls aren’t.

Implied volatility rises in a bearish markets and falls in a bullish markets.

So those who write calls (as part of defined/undefined risk trades) have everything working in their favor:

  • Delta: the market can’t go to the moon in a single day, so you will have time to find liquidity to exit the calls you wrote in case the trade moves against you.
  • Theta: theta decays for the buyers of your calls each day they are wrong. And you gain their loss.
  • Vega: implied vol cannot stay high for too long and has to revert to the mean or lower. People complain about low volatility for years at a time nobody complains about high implied vol for years at a time. This is because they don’t last that long. Also actual threat of blood on the streets is when value investors corner the market and try to stay solvent longer than market is irrational. Then there are the Keynesian hole diggers who do quantitative easing so that the progressives can win the next election.

Of course this doesn’t mean you should write calls willy nilly. And even when you do write calls write them in a 45 DTE.


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