What’s a Fat Tail Put Option?

Option players, please be patient while I try to explain this to non-option investors “…In Plain English.”

First, let me start with an example/quote about a Fat-Tail Put Option:

If one offered investors a fat tail put option that never decays or expires, costs about -1% pa to carry, has no counter party risk & no chance of ever becoming worthless, there would be a line out the door. But when one explains that this option is physical gold… no interest.

–          S. Mikhailovich

A put option is something speculators use to bet on downward movement, or hedgers use to protect long positions.

In the above-mentioned quote, the “put” happens to be against the financial system as a whole. 

In other words, a put, or a bet/hedge against a systemic implosion.

 A “fat tail” refers to something that begins to move exponentially the higher the sigma (risk) event becomes.

The worse the event, the greater the move higher of a fat tailed put in far greater magnitude.  Ultimately in a credit meltdown, owning gold will be the equivalent of owning “all the marbles.”

Mikhailovich is trying to tell you that gold is THE ultimate put option to protect you against a credit meltdown.

Gold costs less than 1% per year to carry (store).  It has no expiration date and it can never ever become worthless.  Most importantly it has no counterparty risk.  (We wrote about that HERE).

In today’s world where literally everything has liability attached, gold has none.

No government or institution needs to guarantee gold.

Mikhailovich finally points out this type of put option, with no time decay or expiration (AND no liability), is the ultimate in protection …but because it is “called” gold, no one has interest.

Gold will be your life boat when the brown stuff hits the fan.

Got Gold?

Learn the best ways to buy gold (HERE).

You’ll thank us later.