Can you imagine there was a time when the entire US options market was running on flat volatility vs strike price (implying that financial asset prices are lognormal). Must have been cool to just buy the cheapest, most OTM options and collect big results every now and then.
His barbell OTM put strategy almost certainly did badly in 2022, because of the failure of the Vix index to spike and the decline of the S&P 500 being orderly.
https://greyenlightenment.com/2022/10/08/tail-hedging-strate...
So both parts of the barbell lost money, which is not supposed to happen. This is why you have to be warry of individuals and strategies that are overhyped. If a strategy is getting a lot of positive press, it likely means it's saturated. If a lot of quants are buying the same options for the same hedging purposes, who is going to sell them?
This may have been possible pre-1987. Since then, out of money put options have a very steep skew, so not possible. Even if OTM put options are very cheap nominally, but by having much higher implied volatility makes them much more expensive compared to how much they would otherwise cost without the skew. This from a Kelly perspective makes them much less lucrative if one was to try to construct a strategy with this. It cuts your ROI big time.
If the outfall from a 7-sigma is disastrous, you have to try to prevent it, because it WILL happen eventually given enough goes.
The easiest way to get something that's not actually normal in the typical central limit theorem construction is to have the variables be just slightly not independent. Which becomes obvious in retrospect after you start realizing the dependence and shit hits the fan.
Also natural distribution assumes you don’t have someone trying to game the extremes to make money. If being seven feet tall resulted in billions we’d have people researching how to grow taller people.
You can see stuff like this in distributions of tax returns - many people will be unexpectedly clustered right below certain cut-off amounts.
I'm not a statistician, but I don't think that's how that works. Given enough events, the likelihood of something happening goes up, but it never becomes a certainty.
Likewise when the statistical 100 year statistical storm happens, the next one is not 100 years away. It could happen the following week without violating the underlying statistics. (Of course if a 100 year storm keeps happening year after year, then the threshold for what is likely to happen once in a hundred years probably needs to be revised.)