Wednesday, June 27, 2007

Making money out of disaster?

The Contrarian Investors' Journal concludes its series on exploiting the possibility of a crash, by suggesting a series of short-term bets on the drop. It's a gamble, of course, but appeals to the Black Swan types who look for an "asymmetric outcome" - a disproportionately large payoff if the unlikely event happens. In other words, if the event has 100-1 odds against occurring, but the bet is offering 500-1, it seems worth taking - if you're a gambler.

But there's another risk involved: the "bookie" may not be willing, or able, to pay out. A prudent investor should consider counterparty risk.

No comments: