Black Swan Trading

Heather Cullen

Heather Cullen

In The Money

Heather Cullen Blog In The Money - Black Swans

Black Swans & Long Tails.

Heather Cullen Blog In The Money - Black Swans

Black swan events are unpredictable and high-impact events that disrupt financial markets – like the GFC and Covid.  Black swan trading involves preparing for and capitalizing on these events. You may remember the film ‘The Big Short’ where betting against the housing bubble of 2007-8 led to immense profits.

Tail Risk

The risk of an extreme event is called ‘tail risk’, and it can be used on one of 2 ways:

    > Protecting a portfolio from catastrophic losses.

    > Capitalizing on any disasters that happen.

We know about protective puts, and we have also seen that they can be a very expensive way to protect your portfolio. But what about a strategy that was intended only to capitalize on Black Swan events? One that had a sort of ‘lottery ticket’ strategy to win big on unexpected crashes while limiting losses they suffer in normal times?

The Black Swan Bestseller

In 2007 (brilliant timing!) Nicholas Taleb published a huge bestseller about black swan events. I particularly like this quote: What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.

A reader brought another book  to my attention last week:  Safe Haven by Mark Spitznagel and Nicholas Taleb, which started me down the rabbit hole into black swan trading and how  it performed.

Empirica Capital

In 1999, Taleb and Spitznagel founded a hedge fund using Taleb’s ‘black swan’ strategy. Shortly after there were 2, arguably 3, black swan events – the DotCom Crash, 9/11 and the second Gulf war. So how did it perform? In 2000, when no black swans occurred one of their funds, Empirica Kurtosis,  made a 57% return. This was obviously the best performing fund in their stable and there is no information on returns of any of their other funds.

In 2001 when according to Taleb’s own definition a black swan (9/11) occurred they made a loss. As they also did in 2002, and single digit gains during the bull market in 2003 and 2004. It closed in 2005. Undeterred Taleb and Spitznagel started another one in January 2007.

Universa Investments

The strategy was to buy OTM put options, and it worked very well during the 2007-8 financial crisis, when a fund returned over 100%. There is speculation that Universal caused the 2010 flash crash by purchasing a large number of puts on SPX, so it probably did well out of that also. It reported that in the 2015-2016 stock market sell off one of the funds returned 20% in August 2015, and a 3,612% return in March 2020 (Covid bear).

It is hard to get accurate data as it is a private hedge fund, so doesn’t report like listed funds.

Naturally, it reports the wild successes, but there is little information on other funds. 

Heather Cullen Blog In The Money - Black Swans
Heather Cullen Blog In The Money - Black Swans

 According to Wikipedia since its inception investors have experienced a 239% net return on capital. Let’s compare it with simply buying SPY shares.

Was it worth the risk?

Spitznagel's Prediction

A picture is worth a thousand words:

Heather Cullen Blog In The Money - Black Swans
Heather Cullen Blog In The Money - Black Swans

Technical Disruptions

Technical disruptions are also black swan events – like the rise of the Internet and smartphones. It AI (Artificial Intelligence) also a black swan event? Interested in your thoughts.

Bear & Bull Strategy Update

The bull strategy 2024 update was published a month ago, and it updates the figures until January 2024. As options prices now are much more expensive than they used to be, it proposes new parameters for choosing options and show the results.

I have just finished updating the bear strategy book to March 2024, including the results in combination with the bull strategy results. It will be published later this week, I hope.

Both books have the same strategy at their heart, but seeing the new parameters would be good for those of you who have previous editions. If you have an eBook, I believe you can get a free update from Amazon. However, I would suggest that a hard copy is better for the ease of  matching graphs and tables with the text.

 I know this is more expensive, so I am planning that on the weekend after Easter I will reduce the price of both the hardback and the paperback to the printing costs + the Amazon overheads I can’t avoid. I have yet to work out exactly what the cost will be but I think it will be around half price.

I will confirm the dates of the discounts in the next blog post.

To the markets

Well, last week was a bit disappointing, but not unexpected. The market took a breather, and everyone is focused on the Fed meeting this week. The higher than expected inflation figures means that the expectation is that they will keep interest rates steady. They publish their decision at 2PM Wednesday, and the minutes 3 weeks later. I often wonder why it takes so long to publish the minutes; after all, surely the meetings and all decisions are recorded. I’m sure I could come up with some good conspiracy theories, but I will restain myself.

SPY Chart

SPY was down slightly for the week – on Friday 8th it closed at $511.71 and on Friday 15th at $509.83, so not hugely different. A period of going sideways would be absolutely normal, but then then so would revisiting 500 – 505 which may turn out to be a support level. Or not!

Heather Cullen Blog In The Money - Black Swans

I have drawn in the possible support level with the blue horizontal line, If SPY stays above this level, then that probably means the bull is going to continue. A drop through that would not be a good sign. We will have to wait and see what happens. In perspective:

We are still well above the resistance level of $474 – let’s hope that this doesn’t get tested for support!

SPYG Chart

SPYG has been flatter than SPY for a few weeks, being more heavily influenced by technology stocks. I have drawn in a couple of trend lines – and remember, trend lines are subjective. Although there are rules about how they should be drawn, the choice of the start and end point is left to the trader, and different traders see different patterns.

However, SPYG , while sitting on the trend line, appears to be forming a Darvas box – remember these?

Heather Cullen Blog In The Money - Black Swans

And in perspective we can see that SPYG has not yet reached its previous high, and appears to be hesitating before challenging it. OK, too much anthropomorphizing!

QQQ Chart

QQQ has basically been going sideways for a month – and if you are into Darvas boxes, I have drawn in what I think it is. If it drops through the floor of it this week it will not be a good sign as the next support level is likely too be $420. Let’s hope not.

For all the talk of tech being in a bubble, it certainly doesn’t look like it to me right now. Let’s check the longer term chart.

VIX Chart

The VIX is gently sloping up, but still very low.


Heather Cullen Blog ITMeter

The week ahead . .

Well, the financial press will be full of speculation of the Fed decision over the next 3 days – probably best just to ignore it and keep your sanity. I am expecting the market to falter a little until then – but let’s check the futures and see.

Well, that was better than expected.  Maybe it will be a good week after all. Fingers crossed!


Thought I’d try my hand at a cartoon using AI – I love all the mistakes!

Heather Cullen Blog In The Money - Black Swans

Comments, Questions and Answers

19 thoughts on “Black Swan Trading”

  1. Good morning, Heather. I just want you to know that I am very appreciative of your books and this blog. I look forward to reading them each week. You have provided us with a way to trade, earn a great return with little work and given us all knowledge that will last a lifetime that we can pass down to our kids too. I am more than excited to have come across your books and am eternally grateful for all you do for us!

    1. HI Charity – thank you so much for your kind words – it was just what I needed this morning!
      Was wondering why I was doing it all (its not for the money I can assure you!) then I get your lovely message and I know why I am doing it.
      Thank you!

  2. I originally wrote this message just because I want to be notified re: updates. Thank you for writing your books, they are well-written and easily understood. I especially appreciate your diligence in ‘sticking with the rules’ in your back-testing, I hate it when I see someone’s backtest and then they break their rules ‘just this one time because … (some personal reason)”. I will be trying out the strategies (Bull and Bear) starting this month. I do have one question. I know that in your ITM book you say something to the effect that it doesn’t matter how many of us use ITM, as the SPY market is huge. But if someone had followed ITM/ITMB since the advent of SPY 30 years ago, reinvesting all gains as they go, they would have an account well over $4M. By that point, they would be buying/selling hundreds if not thousands of options whenever they traded. Yet looking right now at open interest on SPY options ~12 months out shows total open interest of only maybe a thousand, and that is counting OTMs. And since everybody following ITM would be entering the market at the roughly same time and selecting pretty much the same options, wouldn’t this (increasing number of people following ITM + ever-increasing account balances) cause some form of liquidity crunch with the market-makers at trade points, which could then affect the entry/exit prices for those trade points? I admit, this is probably a good problem to have (having so much money to be trading that you can’t trade it all), but I am curious what you think about that. Meanwhile, I am going to try the ITM/ITMB strategy out for a while. Let’s see how it goes.

    1. The number of shares in SPY, is 981,780,000. If we translate that into possible options, there would be 9,817,000 options. There are currently 766,931 call options and 678,238 put options, so the number of options has to increase 680-fold to get to all the shares being covered by options.
      To take your points:
      Firstly, yes, if you had started with ITM 30 years ago you would have now have an account value of $4m. Correct, I think the actual figure is $3.6m, but close) That would enable you to buy 145 options strike 250 June 2024. There are, today, 699. Or maybe you went for Jan 25. There are 1,245 at 350. Or 1,278 at 365. But most people don’t have an account value of $4m, most who follow this blog have less than $1m. And all have different start dates and choose different strikes and expiries.
      If we bought 1,000 call options (as you suggest) at a 50% strike this would cost us $26,610,000 and at a 60% strike would cost $20,708,000. I don’t think many people following this blog have account balances that big!
      Secondly, I don’t know anyone who used ITM in 1993. I certainly didn’t – but I wish I had! The book writing is not a money-making enterprise for me – at best it breaks even, but not when you factor in my time. Then it is an amazing loss, which is why I don’t charge because I can choose to walk away any time.
      Sure, trying things for yourself is a good way to go – I think an even better way is understanding how it works and backtesting over a longer period. Choosing a small window and deducing from that is not, IMHO, an effective test. Testing something by choosing your entry point and a short period is an easy way to say something doesn’t work. Don’t worry, plenty of people have. For example, people who decided to do ITM on the 1st January 2022, the peak of the market, had an abysmal result in the next 2 months. Within a few weeks I had numerous emails threatening me with all sorts of nasty things.
      I will post snapshots of a couple of my US accounts (Schwab) at the bottom of these comments – obviously I have blanked out the balances, but you can see the gains over one year (182% & 58%, different leverages). Both of these accounts have had significant money (one 15% the other 60%) of the balance taken out to fund other things.
      Now think about why someone who can make these gains writes books and answers questions. It’s clearly not about the money! Doing the books and blog was a ‘give back’ because I have been fortunate to work this all out, and wanted to help others.
      OK, Pollyanna stuff over!

  3. Hi. I just bought several of your books. I just came across a question in the book “Timing the Market“ page 49. The table has two columns labeled “excluding 10 worst”. I believe one should be labeled “excluding 10 best”. Which is it? Thank you very much for everything you do. I’m enjoying the material.

  4. I don’t know if this is possible or even desirable. I have been going through your Excellent Excel spreadsheets for backtesting. I know that you have provided a key and instructions which are very helpful but when scrolling through the thousands of rows I get lost in trying to remember the heading of each column. Is it possible to have the column definitions reappear at the top of each page so that we can see what the definition of each column is? If it’s not too much trouble, this would be desirable. Also is it easy to have this data charted? If so, that would be great.


    1. Hi Ron,
      It would stop it being a functioning system to have all the headings repeated inside it. Alternatively it could be done as a purely documentation thing, but that would be weeks of work!
      I know 1,000+ pages is a lot, and I tried to make it easier to read by color-coding the columns, but I’m not really suggesting that anyone actually do that! The notes were how to recreate it yourself if you wished, with the colun headings and explanations of how to do it.
      I don’t want to put up the actual live system, becuase it is too easy for people to take copies, change a few things, and then write a review saying it doesn’t work! I thought I would spare myself the trolling, while showing that there actually was a system and displaying the results.

  5. Heather, I have been following the ITM strategy for more than a year now and think it’s great and you are doing a wonderful job. I would like to ask you a fundamental question about the strategy (who am I to be so impurtinent ?!)
    Essentially the strategy is to buy into the market at the Golden Cross and exit at the Death Cross using the 10 and 200 day moving averages. If the market rises 7% in this year (ie average performance) then the 200 day average would have moved 7%. With our leverage of 2X the gain would be 14%. The return always equals the 200 day performance with leverage. The 10 day moving average is simply the trigger for in or out. The high returns on the strategy over time are a result of compounding this over many bull cycles. My question is: Have you tested the strategy using a different more sensitive out signal than in signal to protect any gains in the interim period of time? You could use a 10/50 death cross, a simple stop loss, etc.etc I realize that this would perhaps signal getting out too soon (but you can always get back in if you are wrong) and raises the likely hood of whipsaws. I just hate sitting where we are today for example with a very healthy gain and simply waiting for the eventual errosion and decline of existing paper profits until the 10/200 moving averages meet. My gut tells me that a different out signal than in signal should/could show a better result. Obviously this would need back testing. I suspect you have given a lot of thought to this and I am interested in hearing your conclusions.
    Best regards Dave Birney

    1. Hi David – thank you for your kind words!
      Yes, I have given it a lot of thought and have backtested some ideas, like getting out when we have a profit of 10%, or there is a 10 / 50 death cross. But you highlight the problem when you say: You could use a 10/50 death cross, a simple stop loss, etc.etc I realize that this would perhaps signal getting out too soon (but you can always get back in if you are wrong)
      If you get out on, say, the 10/50 death cross the question is: when are you wrong? When do you get back i again?

      If you get back in again on a 10/50 golden then you are trading ITM on different parameters, 10 / 50 instead of 10 /200 – and I have tested this and it does not produce good results. If you wait for another 10/200 golden cross, then you may be waiting a long time as there will have to be a 10/200 death cross first.
      I know it sounds easy and logical to get out on a more sensitive signal, but the problem is always: when do you get back in?
      I covered this in a blog post last year, with a chart showing what I meant, here’s the link:
      Hope this helps.

  6. Hi heather,

    I Read ITM, waiting for easter pricing to buy the bear version. Thanks for keeping up with those blog posts. How do you feel about selling monthly option against our ITM call? I know its a big risk that we might have to exercise the long call. Just wondering if you ever backtested selling a call monthly 10% away from current market price.

    1. HI Ruben
      yes, I have aften checked this out for both weekly and monthly, but can never find enough premium to make it worth my while.
      For example, looking at the current options chain, if we go to April 19 (32 days) if we go +10% and look at a strike if 560 the bid / ask is 0.02 / 0.03, which would give us a premium of $3.
      If we go +5%, strike $538, then we get the princely sum of $43.
      Is it possible that SPY could go up 5% in the next month? yes, I think it is definitely possible, so you would be limiting your gains above this.
      I used to do this strategy on 4 days to expiry at 4% abiove, and it worked quite well, but it was a lot of work for not much return and on the odd occasion (probably 1 – 2 times a year) there was a big rise in SPY it wiped out all your profits, so I stopped.
      Like a lot of things in trading, great in theory, not so much in practice.
      Hope this helps

  7. Hello, I’ve just read both of your ITM and ITMB books. I am looking at options just over 1 year old. The lowest time value I can get is about $4.63 (where the intrinsic value is $335.97 and the middle between bid and ask is $340.60). at this time value/intrinsic value, the strike price is 35% of the current price. The delta is 0.998. This doesn’t meet all the requirements laid out in the ITM book. What would you suggest I do? Thanks, Heather H

    1. Hi Heather – nice to meet another Heather! Were you born in Scotland too?
      Re choosing options – I have posted a summary of the currently – available options at the bottom on these comments – the blue ones, the others are SPYG for another query.
      I suggest that you look for September (6 months) or December (9 months ) expiry – and you have quite a good choice from a 49% strike at 0.9% (Sep) – 1.4% (Dec) time value, through to a 59% strike at 1.2% (Sep) – 1.9% (Dec) time value. Check the blue table at the bottom of this page.
      The 2024 update is based on the increased options prices, and backtests 2 sets of parameters – 50% strike and 1% time, and 60% strike and 2% time. I recommend that you either get a free update if you have a eBook, or get the special cost price hard copy on the weekend after Easter.
      Hope this helps

  8. Hi Heather,
    I have very much enjoyed your weekly blog posts, and continue to find them very helpful and insightful! As far as the ITM approach and all the talk about euphoria possibly looming, I was curious what approaches you tend to use to keep an eye out on whether we are indeed getting close to a euphoric market mindset. I know in your books, you mention keeping an eye on news headlines, go guage the subjective mood of the market, however I was wondering if there are any other techniques that you use.

    1. HI Bradley – thank you, you are very kind!
      Re euphoric – my reading is that we are not there yet. The main things I look out for are all positive headlines, and the market ignoring bad news. That doesn’t seem to be happening; the market is skittish, and on any bad news and everyone dumps their positions. Look what happened to NVDA before the results. There was a rumor / belief that they couldn’t be as good as expected so they were brutally dumped. That doesn’t seem to me like euphoria.
      There are some unknowns; its an election year (although the market tends to go up – I asked Chat GPT and after a lot of dire warnings it provided me with this summary:
      1. 1980: The S&P 500 index experienced a decline of about 9.7% during the election year, primarily attributed to economic challenges, including high inflation and rising interest rates.
      2. 1984: The market performed well during this election year, with the S&P 500 index posting a gain of approximately 1.4%.
      3. 1988: Another positive year for the market, with the S&P 500 index rising by around 12.4%.
      4. 1992: Despite uncertainties surrounding the election, the market saw a modest gain, with the S&P 500 index increasing by about 4.5%.
      5. 1996: The market performed strongly during this election year, with the S&P 500 index rising by approximately 20.3%.
      6. 2000: The election year coincided with the bursting of the dot-com bubble, resulting in a significant decline in the stock market. The S&P 500 index dropped by around 9.1%.
      7. 2004: The market rebounded during this election year, with the S&P 500 index posting a gain of about 9.0%.
      8. 2008: The financial crisis unfolded during this election year, leading to a substantial market downturn. The S&P 500 index plummeted by approximately 37% amid the crisis.
      9. 2012: The market experienced moderate growth during this election year, with the S&P 500 index increasing by around 13.4%.
      10. 2016: Despite initial uncertainties surrounding the election outcome, the market rallied after the election, and the S&P 500 index posted a gain of about 9.5%.
      11. 2020: The market faced significant volatility due to the COVID-19 pandemic and uncertainties surrounding the election. However, despite the challenges, the S&P 500 index ended the year with a gain of approximately 16.3%.
      I thought it was pretty good – saved me a lot of time researching!
      Hope this helps

  9. Hi Heather, I hope you are well! … SPYG market price is $71.67 today on 3/17. If I buy at 60% of the market (second question: Does ITM Bull SPYG still follow 60% or is it 50%?), the lowest strike price showing on the options chain is 40, which costs $34.30 (ask). If I calculate the effective price at $74.30, then percentage over the market price is 3.66%. I’m not sure if I am calculating this correctly or if these options are simply more expensive than they used to be a year ago in 2023 (in which does the strategy need to change?).
    The ITM bull strategy for SPYG dictates making the trade with the effective price floating around (or at most) 1% over market price. If following this strategy to a Tee, I would not make the trade as I would not be able to follow it strictly. How could one navigate these waters given the above information?
    I am holding Jun 21 SPYG, which is 96 days from expiry with a trade price of $26.63.

    1. Hi Eli
      Definitely, options are more expensive these days, which is why I have updated the books, and the most effective strike is 60% / 2%. When I was doing the backtesting, I was using the chains from 2 February 2024 and I’ve snapshotted the relevant section below this blog showing the options were actually available. But lets see what we have now.
      I’ve just had a look at the SPYG chains for June 21 and am quite amazed at the spreads – some more than10%! Possibly they will reduce when the market is open, but let’s deal with what is there now. The strikes in the range we are interested in are $30 – $45. I’ve put 2 tables at the bottom, one showing buying halfway between the bid and ask, and one at the ¾ point.
      The 35 strike is approximately 50% of current price, and has a time value of 0.6% so fits the bill. If you want to use the ¾ spread buying point yes, it is over the 1%.
      The 45 strike is over 63% of current price and at midpoint of the spread is .7% over, and even at ¾ of the spread is still below 2%.
      Could I suggest that you get an updated version? If you have an eBook it should be free if you contact Amazon, and I am doing a cost price special weekend for paper / hard cover the weekend after Easter.
      Hope this helps.

Comments are closed.

In Reply to Eli, SPYG Options in backtesting

Heather Cullen ITM Blog

In Reply to Eli, SPYG Options

In Reply to Heather H, SPY Options

Heather Cullen In The Money ITM Blog Update
Heather Cullen Blog Schwab 1

Heather Cullen

Stay up to date

Get notified when there is an ITM Update

Heather Cullen

Book Series

More Blogs

Heather Cullen

Thank you – your message has been sent. Please note that  as of July 2022 Heather will answer all questions in the ITM Blog, not individually. You will be notified when there is a new blog post. Happy trading!