Taleb Explains How He Made Millions On Black Monday As Others Crashed

Former trader and author of best-selling book “The Black Swan” sat down for an interview with Bloomberg News to mark the upcoming thirtieth anniversary of the stock-market crash that occurred on Oct. 19, 1987 – otherwise known as Black Monday.

Taleb famously supercharged his career – and earned a considerable sum of money (though turns out it was less than Taleb felt he deserved) – thanks to his trading profits from that day, which he said were in the “tens of millions of dollars.”

But what did he trade, and how? And furthermore, what was going through his head as he watched the market crumble around him?

Answering a question about what specific strategies he employed, Taleb explained that he relied on “tail options” – contracts that, because they were way out of the money, could be purchased for negligible sums – and placed most of his bets in “professional” markets like currencies and Eurodollar futures.

“The dollar of course collapsed. Dollar-yen options - we had options we had bought for $10,000 in inventory that were selling for 17 million.

 

The thing was going…it was out of control. The big payoffs weren’t in the main, big currencies, but in the ones where the move was a big surprise like Eurodollar or yen. The Swiss franc also had high volatility.”

Asked why the movements in currency and fixed income markets weren’t as heavily covered as the moves in the stock market – which is where the bulk of that day’s carnage unfolded – Taleb said it’s because these markets are strictly for professional traders. Few middle-class investors traded bonds or owned foreign currencies outright back – but everybody seemed to own stocks.

“Because it was a professional market…it was the largest market, fixed income, at the time…but only professionals talk about these things. And all the professionals that were around then are dead…Everybody talks about stocks because people invest in stocks.”

Taleb declined to disclose how much First Boston – the investment bank at which he was employed – paid him for his success that day, though he did say that, because most of his colleagues lost money, the sum was smaller than he had hoped.

“I remember the P&L. In today’s terms for the firm it would be something substantial. But at the time, compensation wasn’t the same. It was in the mid-tens of millions. I made $60, $70, $80 million in one day.

 

First Boston treated me very well. The problem was that it was still a common system where everybody had to share…and everybody had lost money except for me and one other fellow.”

Taleb said he vividly remembers Oct. 20, the day after the crash, when, he said, nearly all of his counterparties were outbidding his offer for his options positions by massive margins.

He specifically remembers trading with famed commodity speculator Richard Dennis, whose hedge fund went bust that day.

"I remember the [October 20], I get on the phone…and I remember there was a fellow called Richard Dennis who went bankrupt that morning at the open. There was a rally in interest rates and the guy was short eurodollars…he lost his $50 million fund…they were liquidating the thing. And I remember I had a huge delta in eurodollars. I remember then vividly offering something on the phone and filling it considerably higher. So, the guy in the pit, I’d say let’s sell here and he’d sell higher. It was like the movie trading places…all morning I remember we were selling above our offers."

Taleb says the events of Black Monday left a lasting impression on him. His success made him brash and overconfident. But it also confirmed his view that the market’s approach to calculating risk failed to take into account the possibility of “six sigma” moves like the Black Friday crash. Indeed, that trend has only worsened with the advent of ETFs and high-frequency trading, which many market strategists believe increase the likelihood of chaotic selloffs like the May 2010 flash crash.

“After the event, I knew that all this stuff you learn in class, the Black-Scholes model, is useless…”

Asked what was going through his head when equity valuations were plummeting all around him, Taleb replies that he was so focused, he wasn't able to process the enormity of that day’s events while they they were happening. All of his attention was focused on executing trades.

“When you’re trading, it’s like being in a battle. It’s like TV. When I’m watching TV, I don’t know what’s happening during the episode. It’s not until later that I find out. I was in a state of heightened concentration."

It wasn’t until a colleague pointed out the magnitude of the move that Taleb began to understand that this might be a once-in-a-lifetime opportunity.

“Someone came to me and made a remark…something like don’t they know that six sigmas are something you only observe once in your lifetime?”

Indeed, it would be 20 years before Taleb would book similarly outsized profits after he joined a handful of contrarians in shorting the market ahead of Lehman Brothers’s September 2008 bankruptcy filing.

As for the extreme focus he exhibited on that day, Taleb said there have been a handful of occasions where he has had to maintain a monk-like level of focus for a prolonged period. He cited the invasion of Kuwait as one example, saying he arrived at First Boston’s office at 2 am, and remained in a state of concentration for 15 or 16 hours.

Ultimately, he says, traders are still underestimating the likelihood of another flash crash. Given the fact that realized volatility recently fell to record lows, this year’s relatively placid equity market has fostered a widespread sense of complacency in markets.

But that could all change in 24 hours’ time.
 

Comments

ludwigvmises Mon, 10/16/2017 - 16:20 Permalink

In 2011, Taleb was suggesting EVERYONE should buy long dated far OTM puts on TLT (bond ETF). It will make "money sooner rather than later". That trade is probably down 80% by now. Taleb's a typical Wall St. snakeoil salesman. They should ask him about THAT trade, not only 1987.

jcaz SickDollar Mon, 10/16/2017 - 16:52 Permalink

Got my Series 7 two weeks before Black Monday, placed my first options trade the prior Thursday-  bot $500 of S&P puts.  I tripled my money on Friday, but I was too much of a newbie to know enough take profits, so I just let it ride.   Black Monday hit, couldn't sell my puts or even get a price on them- market was locked up.   Come Tuesday, I got blown out by my floor manager for $20K;Worst thing that ever happened to me- spent the last 30 yrs trying to recreate the thrill of that trade, lol.

In reply to by SickDollar

ShorTed ludwigvmises Mon, 10/16/2017 - 16:56 Permalink

Read his books.  The idea is to take heavily contrarian positions (way out of the money) as cheaply as possible and roll them until they hit.  so you lose $1000 each roll for 10 or 15 iterations but when it hits it pays millions.Admitedly the strategy takes discipline and is not for everyone.  Oh yeah, and you gotta watch out for, "The market can stay irrational longer than you can stay liquid".

In reply to by ludwigvmises

ludwigvmises ShorTed Mon, 10/16/2017 - 17:07 Permalink

Even if you only commit a puny 0.5% of your initial capital every month to buy those front month way OTM puts, you still lose 6% each year considering your cash collateral isn't earning any interest this whole decade. You'll be in a deep hole rather quickly. Taleb kept saying the Fed is wrong and the bond bubble is bound to implode in a year or two. When someone asked him "What about Japan's bond market? Seems it's going for 25+ years over there" he dismissed that as "misinformed". He can't handle criticism and he always wants to be right.

In reply to by ShorTed

luckylogger ShorTed Mon, 10/16/2017 - 19:19 Permalink

I have done this trade for quite a long time.Generally in this market it is break even over a year.Buy 1 delta options for 10 buks or less.in big contracts like futures or indexes.We are setting up for good put buys in CL and ZN.BUT, not yet!I have not seen the reason to do anything but small size for quite a while....The time is coming to buy 1 delta puts on ES, I just cannot see it yet.This one will probably happen with out a good sized position for me anyway.

In reply to by ShorTed

paint it red c… Mon, 10/16/2017 - 16:52 Permalink

In hindsight, everything i was taught about corporations, government, money, work and education the first 45 years of my life was a lie.

How I long for that old delusion to be the wholesome reality I thought it was.

east of eden Mon, 10/16/2017 - 19:51 Permalink

So, since we are discussing money, and assets and income, I would like to introduce you to the 'new' Bombadier. The Globe and Mail is reporting that Bombardier just sold it's entire majority interest in the C-Series (you know, the company you fucking americans thought you would fuck over) to Airbus.That was the sweetener. It is the beginning of greatly expanded Canadian-European trade. They get the best built, most durable, most highly reliable, comfortable mid-size plane in the world. AND WE GET JOBS, JOBS, JOBS. Which it seems that your great Gonad can not deliver.But wait, there's more!Since Airbus is owned by France and Germany, and they have the power of the European Union behind them, you are no longer dealing with us (Canada), you are now dealing with the European powerhouse.So, to that little fuck, Wylbur Ross, who is about to become a non-billionaire, here is the message. Fuck with us at your own peril. And, if you have the time, stick your fucking head in the toilet, and flush until you can't flush anymore. And no, Boeing is not going to sell any F-18's to Canada, nor will they ever again sell a commercial aircraft into either Canada or Europe. You aren't needed. So while you sally forth on your latest and greatest 'war', the rest of us will get up, go to work, come home, enjoy our families and watch your country disintegrate.As for automotive production, well, you don't know it yet, but we will be signing a bilateral agreement with Mexcio, completely bypassing your ugly country. Automotive manufacturers from around the world will still be able to utilize Canadian engineering and know how and the Mexicans will get to keep their jobs, with increases in salaries and benefits.For the uneducated masses, this is called 'the knockout punch in the middle of the third round', the French call it 'La Coup de Grace', something that our 'beta-male' Trudeaun Jr., was taught to deliver by his brilliant father - you know, the guy that your State Department had on their 'hit list'. Now, how fast can you money-grubbing bastards short Boeing?Cocksuckers. Next I suppose we will have to deal with your 'teaxass rangers' invading Canada on donkeys stolen from the Mexicans. I have no sympathy for you at all. For decades and centuries you have run around the world murdering millions for your own gratification and enrichment. Unfortunatley for you, the next century is going to be one in which you will grub for food and shelter until you are sick to death of it. And it serves you right. Can't think of a better outcome for the other 98.5% of the world.

armageddon addahere Mon, 10/16/2017 - 20:21 Permalink

Another kid with hot dice telling you how he shot the works in Atlantic City. Buying far OTM options is a pure sucker play. But he hit it big, one time, 30 years ago and now he thinks he's a genius.  I read his book and the best way to make a fortune off that guy would be to buy him for what he's worth and sell him for what he thinks he's worth.

Let it Go Tue, 10/17/2017 - 06:40 Permalink

 Timing a market collapse is no easy task. Currently, America and much of the world has been washed along on the momentum created by a wave of freshly printed money and low-interest rates.Auto sales have flourished because of super low-interest rates, and housing has also been pushed along by artificially low-interest rates that distort what might be called the natural laws of economic order. More thoughts below on why this might be a time for caution.Timing Market Top Or Collapse Is No Easy Task