The problem is that the methodology was, and as far I can tell still, completely is completely assailable
Essentially this involves making a bet justified by a set of assumptions, in particular that market movements are distributed over a Gaussian curve. You then insure yourself in case your forecasts *and* assumptions are wrong. Arbitrage protects you if your forecasts are wrong.
However, you aren't covered if your insurer made the same assumptions as you about how markets move and can't now pay out your insurance.
The maths may be unassailable given it's assumptions but that doesn't make it correct in the real world
I assume you know all this stuff and we're just exchanging alternative explanations - if not then I do strongly recommend reading Taleb. He's not just an academic - be personally made millions out of the late 80's and the late 90's market crashes
The essential issue is that models, such as Black-Scholes, that are used to price options assume that the market's movements are distributed according to a Gaussian distribution.
They aren't - it's a power law
The difference is huge
50% of all gains in the stock market in the last 50 years happened on 10 individual days and Black-Scholes says that this can never happen even once in a life time
I speak some Thai and it is really difficult for English speakers to grasp
Imagine - no word for yes or no. Verbs don't change their form for person or tense.
In English we only really have 'it' as the third person singular. In French they have 'il' (masculine it) and 'elle' (Feminine it). In Thai they have literally different hundreds of pronouns for stuff like 'things with handles', 'long thin things', 'containers', 'things with limbs that are not people'
Language is so much more diverse than you would imagine if you don't study it.
Interestingly, this does not make the Sapir–Whorf hypothesis (http://en.wikipedia.org/wiki/Linguistic_relativity) true.
The structure of the language has little, if any, relationship to the deeper mental understanding of the 'way things work'
The headline for the BBC article "Woolly mammoth carcass may have been cut into by humans"
The headline of the linked story "YOUNG MAMMOTH LIKELY BUTCHERED BY HUMANS"
I especially like the excited all-caps style
"Protozoa are small, and bacteria are small, but viruses are smaller than the both put together."