Is your Trading Fragile? Robust? or Anti-Fragile


Fragile- “Easily broken, shattered, or damaged; delicate; brittle; frail.”

Robust- “Strong and healthy; hardy; vigorous.”

Anti-Fragile- “A postulated antithesis to fragility where high-impact events or shocks can be beneficial. Anti-fragility is a concept developed by professor, former trader and former hedge fund manager Nassim Nicholas Taleb. Taleb coined the term “anti-fragility” because he thought the existing words used to describe the opposite of “fragility,” such as “robustness,” were inaccurate. Anti-fragility goes beyond robustness; it means that something does not merely withstand a shock but actually improves because of it.”

If a  fragile trader wanted to buy 100 shares of Apple when the stock was at $700 they would plunk down $70,000 and sit back and wait for the stock to rocket up to $800, unfortunately the fragile trader does not use stops because he trusts his opinion. He knows that it will go to $800 due to fundamentals, it is simply valued too low. The fragile trader sits back and waits. As Apple falls to $675 he buys more., still more at $650, at $600 it is a gift from the investing gods. He ends up doubling his positions to 200 shares now at an average cost of $665 when Apple hit $505 he was down $32,000. The fragile trader was down almost 50% from his original $70,000 investment by adding to the loser instead of cutting it short. The bad thing about being fragile is he used no exit plan, no stop loss to know when he was wrong and had no hedge to protect his long term position during a down trend. Fragile traders are eventually broken.

The Robust trader also believed Apple was heading to $800 over the next quarter based on chart action so he purchased a short term $700 strike call option with 2 weeks before expiration for $1400. This was only putting 2% of total trading capital at risk for the possibility of catching the full upside of Apple above $714 for 2 weeks based on subtracting the the cost of  time value from accrued intrinsic value if he was right. He would cut his loss of the options value if Apple rolled over and fell under the $700 strike to $690 or his option lost 1% of his total account risk capital ($700) whichever one came first. With in days of entry Apple immediately collapsed below $690 and kept going, the nimble Robust trader was able to get out quickly and only lose $700 of the options value or 1% of his original risk capital. Robust traders have small losses when they are wrong and big wins when they are right. They have a trading plan and go with the flow of the market to make money from following trends and price action systematically.

The Anti-Fragile trader expects a big move from Apple when it was at the $700 price level, he figures Apple could go to $800 or $600. He believed the parabolic move could give him the opportunity to make money if the sellers of call options blew up with a continued parabolic move up towards $800 and beyond or the comfortable cozy put sellers could be finally toasted by an unexpected plunge. Selling options is very dangerous because you are risking a lot to make a little. The Anti-Fragile traders want to be long options and on the other side of that capital when it is lost by options sellers. They do not care which side blows up they just want a sudden violent move and a sharp trend either way. They are willing to take small loses on option time value over and over again until they are right. Our Anti-Fragile trader opens a weekly strangle using a $710 strike call option and a $690 strike put option for $600 each. He has tied up $1200 in capital for a week. He owns the full upside above $710 and the full downside below $690. After a $10 move either way he is in the money. After a $12 move he is making money. Neither side of his option play can blow out in value unless the other side goes in the money. His risk is in time decay and not exiting with profits while they are available. As one side of the option play goes in the money the stress of risk is transferred to the seller of that option. Shortly after he opened this option strangle trade and before he had to roll it over to new weeklies Apple gapped down to $680 then rolled over to $660 in short order.  He captured a quick $2,000 profit in days with little capital at risk after considering the price of the time value remaining in the options. He rolled his strangle over to a new weekly $650 strike put and $670 call option and had no idea the move that was about to unfold. He didn’t have to, he was betting both ways.