When Markets Melt Down, These Traders Cash In

"Trading on market chaos is Taleb and Spitznagel's bread and butter. Taleb made a fortune in the Black Monday collapse of 1987. Both made money in the 1990s during market upheavals such as the 1997 Asian financial crisis. Empirica cleaned up in the early 2000s by betting against stocks when the dot-com bubble collapsed.

At the time of its founding, Empirica was highly unusual. Its strategy consisted of making large, consistent bets on major market collapses. At Empirica, investors who put a small percentage of their cash in the fund could be protected when the black swan swooped down.

The strategy worked like this: Every day, Empirica would buy so-called put options [1] that pay off when stocks decline. The bets weren't on small declines -- they were on huge crashes. Normally, the options expired worthless and Empirica took a small loss. But when the market did crash, the options became wildly valuable, providing massive gains while other investors' portfolios went up in smoke." [2]

1."What is put options with examples?

Example of a put option

 

By purchasing a put option for $5, you now have the right to sell 100 shares at $100 per share. If the ABC company's stock drops to $80 then you could exercise the option and sell 100 shares at $100 per share resulting in a total profit of $1,500."

 

2.  EXCHANGE --- When Markets Melt Down, These Traders Cash In --- Mark Spitznagel and Nassim Nicholas Taleb profit from global chaos. They expect a lot of chaos ahead. Patterson, Scott.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 03 June 2023: B.3.