Impact-Canceling Tail Events
When I was about 6 years old I was on a winter vacation with my parents and brother in the Norwegian mountains. Down from the mountain hut it was a great hill for snow sledding. With my little brother sitting in front of my sledge we rushed down the hill. The hill ended in a road that we not had though about, anyway the road had close to no traffic. But of course just now a sizable white truck was coming up the road, hard to see against the snow.
We went too fast to be able to stop; we went underneath the truck just behind the front wheels and by a miracle came out on other side, my brother with a miniscule scratch. My brother and me understood we had done something wrong and was running as fast as we could. We were running up to the mountain cabin where we felt reasonably safe from what we expected to be an angry tuck driver not would find us. About fifteen minutes later someone knocked at the door. It was the tuck driver. He looked surprisingly happily to see us (why?) and told my parents he had been sitting in the car for some time before he had got the courage to walk out and look under his car.
What we had experienced was Impact-Canceling Tail Events, where one bad-impact tail event: getting “hit” by a car had been canceled by an even more extreme tail event; going underneath the car and coming out on other side. No this is not a fairy tail.
Impact-Canceling Tail Events also happens in the market from time to time. For example when the effect of a piece of information that on its own would have big negative impact on the market is canceled out by a piece of good news coming out about simultaneously. Impact-Canceling Tail Events are in general good news if you are short options and bad news if you are long options. (for long options loss of opportunities if canceling information not had happened simultaneously and opposite for short)
Impact-Canceling Tail Events naturally never show up directly in the price statistics etc., because the tail-events was canceling each other out and had no or minimum price impact, you have to be there live it and feel it to know it happen (or potentially extract it from other types of data....).
Also if you not are watching the market all the time and two events with different impact-sign hits the market (but you are not taking advantage/disadvantage of it because you simply not are watching the market) then such events will typically have same practical effect (on profit and loss) as if it was Impact-Canceling Tail Events. In other words if you had a long “gamma” position you missed out of some great opportunities to capture some wild fluctuations (unlucky, lazy, and you would feel like an idiot…), and if you where short “gamma” you where a lucky fool (feel like a genius). (PS: If exchange traded and time-gap was longer than intraday and you had short option postion you would possibly get killed by margin requirements).
