But could you reliably make money knowing that LTCM will fail eventually?
Just LTCM, no. But (if we ignore the transaction costs which make this idea not quite practicable) there are enough far-out-of-the-money options being traded for me to construct a well-diversified portfolio that would allow me to reliably make money—of course, only if these options were Black-Scholes priced on the basis of the same implied volatility as the near-the-money options and in reality they are not.
Just LTCM, no. But (if we ignore the transaction costs which make this idea not quite practicable) there are enough far-out-of-the-money options being traded for me to construct a well-diversified portfolio that would allow me to reliably make money—of course, only if these options were Black-Scholes priced on the basis of the same implied volatility as the near-the-money options and in reality they are not.
This assumes the different black swans are uncorrelated.
Yes, to a degree. However in this particular case I can get exposure to both negative shocks AND positive shocks—and those certainly are uncorrelated.