The strategy worked like this: Every day, Empirica would buy so-called put options 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.
The birth of their strategy, for both Taleb and Spitznagel, occurred in the 1980s. For Spitznagel, it emerged from the hard-charging trading pits in Chicago. For Taleb, it started with one of the biggest market blowups of modern times.
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