Mat Cashman and I did a teach-in session to a large audience of conference-goers who use options. Hereโs one idea from that session.
What does optionality actually buy you?
The simplest way to understand the value of buying an option for directional reasons is to benchmark it to the counterfactual: how do I perform relative to โif I just bought the stock?โ
If you buy a call, you do better in the large up move OR the large down move vs just buying the stock. You have more upside leverage, and if the stock craters, you only lose your premium. The tradeoff is that the option strategy underperforms owning the shares on intermediate-sized moves. Thatโs why we say owning an option is โlong volatilityโ even if someone resists thinking in such admittedly abstract terms.
The chart subtracts the P/L of 100 shares from the P/L of ~2.2 calls on the 1-year 110 strike, at expiry. The calls cost $2,194 and carry the same delta as shares that cost $10,000 (100 shares of a $100 stock).
๐จExercise: Solve for what delta the calls are
The shares win between roughly $78 and $137. The gap is widest at $110, where the calls expire worthless and the shares are up $1,000, a $3,200 difference. Below $78, the calls lose $2,194 at most while the shares keep falling. Above $110 the calls behave like 217 shares instead of 100.
If you buy a call and lose your premium, you canโt evaluate if this is a good or bad outcome without considering the counterfactual.
The INTC calls and a possible Micron sympathy trade
This was one of the examples I discussed in the live stream session where we talked about combining sources of data to reason through trade ideas.
The print. On Sep 28th, there was notable size buying in INTC October 16 130 calls.
An odd expiry. It was a lot of premium spent on high gamma & theta calls which expire a week ahead of Intelโs October 23 earnings call. Why spend that much premium on a short-dated bet that rolls off before the stockโs own catalyst?
The sympathy hypothesis. Micron was reporting on the day I was talking after the close, Sep 30th. Maybe the buyer was using INTC as a semis proxy, owning short-dated calls to catch a sympathy move off Micronโs print. Itโs one possible story, not something I can confirm.
Did the seller make a mistake? A seller may think โthese donโt capture earnings, so they donโt deserve a premium,โ or INTC shouldnโt move much in the quiet blackout period before an earnings report, ignoring possible spillover effects from MUโs bellwether report and guidance.
The next question. Is Micron earnings even a big deal? Look at Micronโs earnings straddle. If the implied move is small, the market isnโt expecting Micron to move much. Then the sympathy thesis loses most of its appeal, since thereโs less distance for INTC to get dragged along. Turn out MU earnings were priced cheaply compared to the last few years.
Then look at what INTC vol already costs. Implied vol was middle-of-the-road but high cross-sectionally (ie relative to other stocks in the current market regime). Call skew was rich, though not extreme.
Put it together. Rich vol plus a firm call skew, the primary market for MU volatility saying earnings are going to be a non-event, and a possible story for putting the INTC buyer โon a handโ adds up to making me more inclined to want to fade the INTC call buyer. Possible trades are selling INTC straddles or, if you already own the stock, writing calls against it.
You donโt have to sell the 130s to fade the 130 buyer. Heavy buying in one strike lifts vol across that whole expiry. Strikes near each other move together, so the bid in the 130 calls shows up in the 125s, the 135s, and the at-the-money options too. Selling the straddle, or whatever structure fits your book, still takes the other side of this buyer. Donโt anchor on the exact strike that printed. Put-call parity ensures the entire surface gets richer.
Finally, an analogy I didnโt make at the conference, but notice how much like poker the chain of thought is. The cards you can see (ie the flop) are the measurables like IV rank or call skew. The quantity of options purchased is the bet size. The expiry is like thinking about the position they bet from (ie โunder the gunโ or right after the button to last position or โdealerโ). One of the market-makersโ advantages is that they keep tabs on notable flow, like a poker bot which examines online playersโ hand histories and tendencies.
One of my close friends runs an advisory for HS students applying to college. He wrote this guest post years ago: Moneyballing College Admissions.
He lives in the Bay Area and told me heโs seeing more parents complaining about the lack of acceleration options in the public school. He said outside CA itโs becoming far more common for high schoolers to take AP Calculus BC before senior year. My 8th gradersโ goal is to take it by junior year, giving himself a chance to take Multivariate Calculus by senior year at a local college. This is already offered in some high schools across the nation, including some on the peninsula. Just this week, I talked to someone whose 9th grader was in Calc BC. That only sounds crazy if you havenโt been paying attention to what Iโve been sharing about Math Academy students (my 8th grader says his 5th grade little bro is already doing the same stuff his โadvancedโ math class is doing.)
In our local school district, we are finally seeing the pendulum swing the other way on math instruction. A few years ago, they got rid of โtrackingโ in 6th grade, forcing all kids, regardless of their interest/aptitude, into the same class. Well, the seeds of change are obvious in this survey I just filled out, as I donโt think we could have even had this conversation 5 years ago:
That #7 offers choices besides โsupportiveโ and โvery supportiveโ tells me these 2 articles are as important as I think they are.
Pamela Hobart argues โthe academic acceleration community needs a viable brandโ. Co-sign. Terrific post. Iโve had many of the same thoughts, especially as my kidโs schoolwork will leave me wondering, as Pamela has, โwhat are we even doing here?โ
Everyone Wants a Child Like Eileen Gu (10 min read)
โalmost nobody today wants the childhood that produced her.โ
Violet Gordeljevic spitting truth in this one. Iโll share a few excerpts that resonated with me. You should read it to see what lands or doesnโt for you.
On Discipline and Exceptionalism
โSo when people say she sounds and talks so disciplined, and that she knows her own mindโwell, yes. That is what a decade of being asked to do your best looks like from the outside.โ
โNobody arrives at exceptional by accident. It doesnโt turn up later as a nice surprise because the child was left alone and bored for long enough.โ
On Passion and Competence
โPassion doesnโt usually come first and then get supported. Usually exposure comes first, then competence (from actually having gone through practice), and passion tends to arrive somewhere after that, because human beings mostly love the things they are good at.โ
โWhat is important to understand is that she could not have fallen in love with skiing, or Mandarin, or Olympiad maths, if nobody had ever put her in front of these thingsโฆA child who is never introduced to numbers will not reveal unusual mathematical ability. A child who never sits at an instrument will not discover she has an ear.โ
On Modern Parenting and โFull Schedulesโ
โWe didnโt lighten the load at all. We drive our children to more things than any generation in history. We just stopped asking them to become good at any of it.โ
โIf we are honest, the schedule is full but the demand is zero. Itโs honestly like we have swapped skill for entertainment.โ
โUnderneath every version of this conversation sits the same line: I donโt need my child to be exceptional, I just want them to be happy. … But being the parent who stretches a childโwho asks for one more go, who expects them to learn to write something properly or figure out that math equation, who holds the line at six when she wants to quit balletโdoing this is harder and considerably less pleasant than being her friend.โ
On Warmth, Adversity, and Long-Term Value
โProtecting a child from effort is not the same as protecting a child.โ
โWhat separates people with more demanding childhoods from those with easy, low demand ones, isnโt how much or even what was asked. Itโs rather whether the asking sat inside enough warmth to be survivable.โ
โThe choice was never between pressure and love. It was always meant to be both.โ
And then my 2 favorite:
โI have met a great many people who regret being allowed to quitโ
โThe thing is, children are not good judges of what they will be glad to be good at at thirty.โ
One of my close friends runs an advisory for HS students applying to college. He wrote this guest post years ago: Moneyballing College Admissions.
He lives in the Bay Area and told me heโs seeing more parents complaining about the lack of acceleration options in the public school. He said outside CA itโs becoming far more common for high schoolers to take AP Calculus BC before senior year. My 8th gradersโ goal is to take it by junior year, giving himself a chance to take Multivariate Calculus by senior year at a local college. This is already offered in some high schools across the nation, including some on the peninsula. Just this week, I talked to someone whose 9th grader was in Calc BC. That only sounds crazy if you havenโt been paying attention to what Iโve been sharing about Math Academy students (my 8th grader says his 5th grade little bro is already doing the same stuff his โadvancedโ math class is doing.)
In our local school district, we are finally seeing the pendulum swing the other way on math instruction. A few years ago, they got rid of โtrackingโ in 6th grade, forcing all kids, regardless of their interest/aptitude, into the same class. Well, the seeds of change are obvious in this survey I just filled out, as I donโt think we could have even had this conversation 5 years ago:
That #7 offers choices besides โsupportiveโ and โvery supportiveโ tells me these 2 articles are as important as I think they are.
Pamela Hobart argues โthe academic acceleration community needs a viable brandโ. Co-sign. Terrific post. Iโve had many of the same thoughts, especially as my kidโs schoolwork will leave me wondering, as Pamela has, โwhat are we even doing here?โ
Everyone Wants a Child Like Eileen Gu (10 min read)
โalmost nobody today wants the childhood that produced her.โ
Violet Gordeljevic spitting truth in this one. Iโll share a few excerpts that resonated with me. You should read it to see what lands or doesnโt for you.
On Discipline and Exceptionalism
โSo when people say she sounds and talks so disciplined, and that she knows her own mindโwell, yes. That is what a decade of being asked to do your best looks like from the outside.โ
โNobody arrives at exceptional by accident. It doesnโt turn up later as a nice surprise because the child was left alone and bored for long enough.โ
On Passion and Competence
โPassion doesnโt usually come first and then get supported. Usually exposure comes first, then competence (from actually having gone through practice), and passion tends to arrive somewhere after that, because human beings mostly love the things they are good at.โ
โWhat is important to understand is that she could not have fallen in love with skiing, or Mandarin, or Olympiad maths, if nobody had ever put her in front of these thingsโฆA child who is never introduced to numbers will not reveal unusual mathematical ability. A child who never sits at an instrument will not discover she has an ear.โ
On Modern Parenting and โFull Schedulesโ
โWe didnโt lighten the load at all. We drive our children to more things than any generation in history. We just stopped asking them to become good at any of it.โ
โIf we are honest, the schedule is full but the demand is zero. Itโs honestly like we have swapped skill for entertainment.โ
โUnderneath every version of this conversation sits the same line: I donโt need my child to be exceptional, I just want them to be happy. … But being the parent who stretches a childโwho asks for one more go, who expects them to learn to write something properly or figure out that math equation, who holds the line at six when she wants to quit balletโdoing this is harder and considerably less pleasant than being her friend.โ
On Warmth, Adversity, and Long-Term Value
โProtecting a child from effort is not the same as protecting a child.โ
โWhat separates people with more demanding childhoods from those with easy, low demand ones, isnโt how much or even what was asked. Itโs rather whether the asking sat inside enough warmth to be survivable.โ
โThe choice was never between pressure and love. It was always meant to be both.โ
And then my 2 favorite:
โI have met a great many people who regret being allowed to quitโ
โThe thing is, children are not good judges of what they will be glad to be good at at thirty.โ
Money Angle
Wrapping up Kelly
I know Iโve published a few articles on the Kelly Criterion recently, but if you prefer other mediums:
I was in Houston this week for the Robinhood Summit to help with 2 sessions.
A โtrading labโ class where Mat Cashman and I gave a lesson on buying options.
I was also invited to play the role of โtraderโ on a panel featuring a few of the data providers on RHโs new agentic trading platform. You can think of it like an app store, where users can subscribe to have vetted providersโ data accessible within RHโs trading agent.
Since this panel was on the โmain stageโ the recording is available here:
The kids were able to watch the live stream before school
Money Angle For Masochists
2 examples from the Summit.
Mat Cashman and I did a teach-in session to a large audience of conference-goers who use options. Hereโs one idea from that session.
What does optionality actually buy you?
The simplest way to understand the value of buying an option for directional reasons is to benchmark it to the counterfactual: how do I perform relative to โif I just bought the stock?โ
If you buy a call, you do better in the large up move OR the large down move vs just buying the stock. You have more upside leverage, and if the stock craters, you only lose your premium. The tradeoff is that the option strategy underperforms owning the shares on intermediate-sized moves. Thatโs why we say owning an option is โlong volatilityโ even if someone resists thinking in such admittedly abstract terms.
The chart subtracts the P/L of 100 shares from the P/L of ~2.2 calls on the 1-year 110 strike, at expiry. The calls cost $2,194 and carry the same delta as shares that cost $10,000 (100 shares of a $100 stock).
๐จExercise: Solve for what delta the calls are
The shares win between roughly $78 and $137. The gap is widest at $110, where the calls expire worthless and the shares are up $1,000, a $3,200 difference. Below $78, the calls lose $2,194 at most while the shares keep falling. Above $110 the calls behave like 217 shares instead of 100.
If you buy a call and lose your premium, you canโt evaluate if this is a good or bad outcome without considering the counterfactual.
The INTC calls and a possible Micron sympathy trade
This was one of the examples I discussed in the live stream session where we talked about combining sources of data to reason through trade ideas.
The print. On Sep 28th, there was notable size buying in INTC October 16 130 calls.
An odd expiry. It was a lot of premium spent on high gamma & theta calls which expire a week ahead of Intelโs October 23 earnings call. Why spend that much premium on a short-dated bet that rolls off before the stockโs own catalyst?
The sympathy hypothesis. Micron was reporting on the day I was talking after the close, Sep 30th. Maybe the buyer was using INTC as a semis proxy, owning short-dated calls to catch a sympathy move off Micronโs print. Itโs one possible story, not something I can confirm.
Did the seller make a mistake? A seller may think โthese donโt capture earnings, so they donโt deserve a premium,โ or INTC shouldnโt move much in the quiet blackout period before an earnings report, ignoring possible spillover effects from MUโs bellwether report and guidance.
The next question. Is Micron earnings even a big deal? Look at Micronโs earnings straddle. If the implied move is small, the market isnโt expecting Micron to move much. Then the sympathy thesis loses most of its appeal, since thereโs less distance for INTC to get dragged along. Turn out MU earnings were priced cheaply compared to the last few years.
Then look at what INTC vol already costs. Implied vol was middle-of-the-road but high cross-sectionally (ie relative to other stocks in the current market regime). Call skew was rich, though not extreme.
Put it together. Rich vol plus a firm call skew, the primary market for MU volatility saying earnings are going to be a non-event, and a possible story for putting the INTC buyer โon a handโ adds up to making me more inclined to want to fade the INTC call buyer. Possible trades are selling INTC straddles or, if you already own the stock, writing calls against it.
You donโt have to sell the 130s to fade the 130 buyer. Heavy buying in one strike lifts vol across that whole expiry. Strikes near each other move together, so the bid in the 130 calls shows up in the 125s, the 135s, and the at-the-money options too. Selling the straddle, or whatever structure fits your book, still takes the other side of this buyer. Donโt anchor on the exact strike that printed. Put-call parity ensures the entire surface gets richer.
Finally, an analogy I didnโt make at the conference, but notice how much like poker the chain of thought is. The cards you can see (ie the flop) are the measurables like IV rank or call skew. The quantity of options purchased is the bet size. The expiry is like thinking about the position they bet from (ie โunder the gunโ or right after the button to last position or โdealerโ). One of the market-makersโ advantages is that they keep tabs on notable flow, like a poker bot which examines online playersโ hand histories and tendencies.
From My Actual Life
Once the RH Summit ended, I was rewarded with some nice personal moments. I took Mat Cashman to Camaraderie in the Heights area of Houston for an exceptional meal by super chef Shawn Gawle.
Cashman is a fitting name for a trader
Shawn is a friend of mine. He lived with Yinh and I for a couple of months when he first moved to SF to be the pastry chef at Saison. If you are in Houston, do not miss Camaraderie.
Finally getting to experience what I fully expected to live up to the hype.
Then on Friday, Yinh and I celebrated our 17th wedding anniversary. (Weโve been together for 23 years in total).
We both played hooky and went hiking up in Fairfax (Marin County) before an exceptional dinner at Vin in San Rafael. Itโs both casual (we were still in hiking clothes) and worth going out of your way for. Unbelievable eating week. Might as well. I have a colonoscopy later this week, so I need to follow some dietary restrictions for the next few days.
We also did a bit of shopping in downtown San Rafael. Picked up some used vinyl at Red Devil and also went to one of the best game shops Iโve ever been in:
This Gamescape has a shared lineage with the classic one on Divisadero in SF but the San Rafael one is much larger. Their game wall is immense and ordered from least to most complex.
I picked up these 2:
Acquire is one of my favorite games and while I have it already, this newer edition has irresistible plastic buildings. I must support this.
Brass Birmingham has been at or near the top of the BGG rankings for nearly a decade, which is Nigel Richardsโ level of domination. My favorite boardgame is the first edition of Brass released in 2007, but supposedly the 2018 Brass Birmingham is much better. Time to find out.
Stand at one spot on a curve, measure everything you can there, and use those measurements to guess the height somewhere else.
You’d do this when the curve is hard to compute everywhere but easy to measure at one point, or when you want to see what drives a change. A bond’s price is a familiar case: you know its yield and duration today and want to know what happens if rates move.
The guess is built in layers. Each layer uses one more thing you measured at the anchor. The first layer is a straight line. The second bends it. The third bends the bend. You stop when the layers stop mattering, or when you run out of measurements.
Worked example: guess xยณ at x = 1.2 using only what you know at x = 1
The curve is y = xยณ. You are standing at x = 1. The true answer is 1.2ยณ = 1.728, but pretend you can’t compute it.
What you know at x = 1
Thing
How you get it
Value at x = 1
Height
xยณ
1
Slope
derivative, 3xยฒ
3
How fast the slope changes
derivative of that, 6x
6
How fast that changes
derivative of that
6
Anything further
derivative of a constant
0
The walk. Destination minus start: 1.2 โ 1 = 0.2. Call it h.
Layer 1: pretend the slope stays 3. Guess = height + slope ร walk = 1 + 3 ร 0.2 = 1.6. Off by 0.128.
Layer 2: the slope drifts. It goes up at 6 per unit, so over the walk it rises from 3 to 3 + 6 ร 0.2 = 4.2. Use the average slope, 3.6, instead of 3. Guess = 1 + 3.6 ร 0.2 = 1.72. Off by 0.008.
Written as a separate correction: the new piece is ยฝ ร 6 ร 0.2ยฒ = 0.12, added to the 1.6.
Layer 3: the drift rate drifts. Same move one level deeper. The correction is 6 ร 0.2ยณ รท 6 = 0.008. Guess = 1.728. Off by exactly 0.
Layer 4 and beyond: the measurement is 0, so every further correction is 0.
The guess is now perfect at x = 1.2, and it’s perfect at every other x too. xยณ only has three pieces of information in it. Use all three and you have rebuilt the function.
Try it at x = 3 (walk h = 2): 1 + 3(2) + 3(2)ยฒ + (2)ยณ = 1 + 6 + 12 + 8 = 27 = 3ยณ. Still exact, even two units from the anchor.
Layer 1 is the tangent line. Layer 2 bends it into a parabola that hugs the curve near x = 1 but misses on both sides. Layer 3 (dashed) lies on top of the black xยณ curve at every x, which is the whole point: for a polynomial, enough layers is exactly the function.
Why you divide by 2, then 6, then 24
Each layer’s measurement gets divided before it’s used: layer 1 by 1, layer 2 by 2, layer 3 by 6, layer 4 by 24. Those are 1!, 2!, 3!, 4!. Two ways to see why.
The averaging picture. Layer 2 used the average slope over the walk. The slope was a ramp going from 3 to 4.2, and the average of a ramp is halfway: that’s the รท2. Layer 3 needs the average of something that grows like a parabola, and a parabola from zero spends most of the walk being small, so its average is only a third of its end value: another รท3. Stack them: 2 ร 3 = 6. One more level and the average of a cubic is a quarter: 2 ร 3 ร 4 = 24.
Check the parabola claim with numbers. Sample tยฒ at t = 0.1, 0.2, โฆ, 1.0: you get 0.01, 0.04, 0.09, 0.16, 0.25, 0.36, 0.49, 0.64, 0.81, 1.00. They add to 3.85, average 0.385, and with finer sampling it settles to โ .
The power-raising picture. Differentiating hโฟ gives n ร hโฟโปยน: lowering a power by one multiplies by that power. So raising a power by one divides by it. To turn a constant measurement into a term in hยณ you raise the power three times, paying รท1, รท2, รท3 along the way. That product is 3! = 6.
Layer
Measurement (xยณ at 1)
Divide by
Term
1
3
1
3h
2
6
2
3hยฒ
3
6
6
hยณ
4
0
24
0
Worked example: ln x, where the corrections stop helping
Same game, anchor at x = 1. Height is ln 1 = 0. Slope is 1/x, so 1 at the anchor.
What you know at x = 1
Layer
Derivative
Value at 1
Divide by
Term
1
1/x
1
1
h
2
โ1/xยฒ
โ1
2
โhยฒ/2
3
2/xยณ
2
6
hยณ/3
4
โ6/xโด
โ6
24
โhโด/4
5
24/xโต
24
120
hโต/5
6
โ120/xโถ
โ120
720
โhโถ/6
The measurements never hit zero. They alternate sign and grow. So there is always another correction, forever. Whether the corrections help depends on how far you walk.
Short walk: x = 1.5, so h = 0.5. True value ln 1.5 = 0.4055.
Layers used
Guess
Gap
1
0.5
0.0945
2
0.375
0.0305
3
0.4167
0.0112
4
0.4010
0.0044
5
0.4073
0.0018
6
0.4047
0.0008
Each layer roughly halves the gap. Keep going and it heads to zero.
Long walk: x = 2.5, so h = 1.5. True value ln 2.5 = 0.9163.
Layers used
Guess
Gap
1
1.5
0.5837
2
0.375
0.5413
3
1.5
0.5837
4
0.2344
0.6819
5
1.7531
0.8368
6
โ0.1453
1.0616
The gap gets worse. Each term is ยฑhแต/k, and with h = 1.5 the hแต grows faster than the k can shrink it: 1.5, 1.125, 1.125, 1.27, 1.52, 1.90, โฆ The guess swings wider and wider around the truth.
Inside the band the colored curves pile onto the black one, each layer tighter than the last. Right of x = 2 they fan out: layer 3 shoots up, layer 4 dives, layer 5 shoots higher, layer 6 dives harder. Every extra layer swings further from ln x instead of closer.
The rule. For ln x about 1, the corrections help when |h| < 1 and hurt when |h| > 1. That distance, 1, is the radius of convergence. It’s set by where the function itself breaks: ln x blows up at x = 0, exactly one unit left of the anchor, and the series can’t reach further right than it can reach left.
xยณ had no such limit because its corrections ran out before they could misbehave. That is the difference between a polynomial and everything else.
the curve you’re guessing; f(x) is its height at x
xยณ
x
“x”
the destination, any point on the horizontal axis
1.2
xโ
“x-nought”
the anchor, where you stood and took measurements
1
x โ xโ
“the walk”
destination minus start, also written h
0.2
P
“the polynomial”
the guess; a polynomial because it’s a sum of powers of the walk
1 + 3h + 3hยฒ + hยณ
n
“n”
how many layers you used; the highest power in the guess
3
Pโ(x)
“P-n of x”
the guess using n layers, evaluated at x
Pโ(1.2) = 1.728
k
“k”
the counter: which layer you’re on, running 0, 1, 2, โฆ up to n
0, 1, 2, 3
ฮฃโโโโฟ
“sum from k = 0 to n”
add up the term for every k from 0 through n
four terms
fโฒ, fโณ, fโด
“f-prime, double-prime, triple-prime”
first, second, third derivative: slope, rate of slope, rate of that
3xยฒ, 6x, 6
fโฝแตโพ
“f-k”
the k-th derivative; fโฝโฐโพ is f itself, fโฝยนโพ is fโฒ, and so on
fโฝยฒโพ = 6x
fโฝแตโพ(xโ)
“f-k at x-nought”
the k-th derivative evaluated at the anchor, a plain number
1, 3, 6, 6
k!
“k factorial”
1 ร 2 ร โฆ ร k, the divide-by column; 0! = 1
1, 1, 2, 6
(x โ xโ)แต
“the walk to the k”
the walk raised to the layer number
1, 0.2, 0.04, 0.008
f(x) โ Pโ(x)
“the gap”
true height minus guess
0
ฮพ
“xi” (Greek letter)
some unknown point between xโ and x; used only in the error formula
somewhere in [1, 1.2]
So the k = 2 term of the sum is: take the second derivative (6x), evaluate at the anchor (6), divide by 2! (3), multiply by the walk squared (0.04). That’s 0.12, the layer-2 correction from the worked example.
How big is the gap? It’s controlled by the next measurement you didn’t use, taken somewhere along the walk:
f(x) โ Pโ(x) = fโฝโฟโบยนโพ(ฮพ) / (n+1)! ยท (x โ xโ)โฟโบยน for some ฮพ between xโ and x
Read it as: the gap is small when the walk is short (the hโฟโบยน is tiny), when the next derivative is tame, or when n is large enough that (n+1)! dominates. The gap is large when the walk is long and the higher derivatives are big, which is exactly what happened to ln x at x = 2.5.
Real-world uses
Four places you’ve met this without the name. Each is worked with numbers.
Bond prices: duration and convexity. A 10-year zero at a 4% yield is priced 100/1.04ยนโฐ = 67.56. The anchor is 4%. The two measurements are duration (layer 1, slope) = 10/1.04 = 9.62 and convexity (layer 2) = 10 ร 11/1.04ยฒ = 101.7.
Yield rises 1%, so the walk is 0.01:
Layers
Guess
True price
Gap
1 (duration only)
67.56 ร (1 โ 9.62 ร 0.01) = 61.06
61.39
0.33
2 (add convexity)
61.06 + 67.56 ร ยฝ ร 101.7 ร 0.01ยฒ = 61.40
61.39
0.01
Yield rises 3%, walk 0.03: duration alone says 48.07, convexity pulls it to 51.16, true is 50.83. The gap is 30 times larger than for the 1% move. That’s the long walk. Traders quote duration and convexity for exactly the reason your tool quotes delta and gamma.
How a calculator computes sin. There’s no sin key inside the chip; it sums the series about 0: x โ xยณ/6 + xโต/120 โ xโท/5040 + โฆ.
sin(0.5): 0.5 โ 0.0208 + 0.0003 = 0.4794. True value 0.4794. Three terms.
sin(3): 3 โ 4.5 + 2.025 โ 0.434 + 0.050 โ 0.004 = 0.137. True value 0.141. Six terms and still off in the third decimal. The series converges everywhere, unlike ln x, but a long walk needs many more layers. Calculators dodge this by folding the input back to a small angle first, which is the “walk less” strategy.
Pendulum clocks. The textbook period T = 2ฯโ(L/g) comes from replacing sin ฮธ with ฮธ, which is layer 1 of the sine series. The next layer says the true period is longer by a factor of about 1 + ฮธโยฒ/16, where ฮธโ is the swing in radians.
Swing
ฮธโ in radians
Correction
Period error if you ignore it
5ยฐ
0.087
1.0005
0.05%
20ยฐ
0.349
1.0076
0.8%
60ยฐ
1.047
1.069
7%
A clock built on layer 1 keeps time at small swings and drifts at big ones. Same story: the anchor is ฮธ = 0 and the walk is the amplitude.
Compound growth. (1 + r)โฟ about r = 0 is 1 + nr + n(nโ1)rยฒ/2 + โฆ. For 5% over 10 years: layer 1 says 1.50, layer 2 says 1.50 + 45 ร 0.0025 = 1.61, true is 1.63. Layer 1 alone is the “simple interest” mental shortcut, and the layer-2 term is exactly how much compounding beats it.
All four break the same way ln x did. Past some size of move the layers you kept stop describing the function, and the fix is either more layers, a shorter walk, or computing the real thing.
Quick reference
Recipe for any function about any anchor
Pick the anchor xโ. Compute the walk h = x โ xโ.
Take derivatives of f until you have as many as you want, and evaluate each at xโ.
Divide the k-th one by k!, multiply by hแต.
Add them up. That’s the guess. The leftover is the gap.
If the derivatives hit zero, the guess becomes exact. If they don’t, check whether the terms are shrinking; if not, you walked too far.
The two examples side by side
xยณ about 1
ln x about 1
Derivatives at anchor
1, 3, 6, 6, 0, 0, โฆ
0, 1, โ1, 2, โ6, 24, โฆ
k-th term
3h, 3hยฒ, hยณ, then 0
(โ1)แตโบยน hแต / k
Exact after
3 layers
never
Works for
every x
0 < x < 2 only
Why
polynomial: information runs out
ln x breaks at 0, one unit from the anchor
Factorials
k
k!
Average of tแต over [0, h]
1
1
h/2
2
2
hยฒ/3
3
6
hยณ/4
4
24
hโด/5
5
120
hโต/6
Common series about 0, for reference
Function
Series
Converges for
eหฃ
1 + x + xยฒ/2 + xยณ/6 + โฆ
all x
sin x
x โ xยณ/6 + xโต/120 โ โฆ
all x
cos x
1 โ xยฒ/2 + xโด/24 โ โฆ
all x
1/(1โx)
1 + x + xยฒ + xยณ + โฆ
|x| < 1
ln(1+x)
x โ xยฒ/2 + xยณ/3 โ โฆ
โ1 < x โค 1
The last two have a radius because the function breaks at x = 1 or x = โ1. The first three never break, so the series works everywhere even though it never terminates.
Key Insights
What
Why it matters
Anchor and walk
Everything is measured at one point; the guess only ever knows about that point
Layers = derivatives
Each derivative at the anchor buys one more correction; that is all the information you have
Divide by k!
Raising a power costs a division each time; averaging a ramp, parabola, cubic costs รท2, รท3, รท4
Polynomials terminate
Derivatives hit zero, so finitely many layers rebuild the function exactly, everywhere
Radius of convergence
For everything else, past the distance to the nearest breakdown the layers make the guess worse
The gap formula
The error is the first term you dropped, evaluated somewhere on the walk
My second favorite thing after a piece of art, writing, music, movie, and sport that I love is watching someone else gush over things they love. Itโs why the Lost in Vegas guys are so endearing, especially when the channel first started. You were watching hip-hop heads not only discover but unpeel the layers in Toolโs music.
One of my dad friends recently bought a 1979 Jeep to restore with his son and asked if my son Zak (13) would like to help. Zakโs โhell yeaโ beat the sound of my last syllable when I asked him. He started watching YouTube, and we landed on a channel where these obsessed details comb the U.S. looking for โbarn findsโ to clean for the owners. For free! Itโs free because the channel has almost 2 million subscribers clamoring to watch an impossible cleaning.
I watched a few videos. I get it. Renewal of beauty, just like the objects of renewal never goes out of style. The process is as timelessly rewarding as the result.
Caitlinโs tweet is an appeal to our spirit of obsession and craft.
This essay not only feels good but is an important lens on the fast-approaching experiment of whether infinite electric monkeys will pound out Shakespeare.
Normally I might apologize for extensive excerpting but they are the point. I can do no better than this.
It opens:
I owe an apology to every English teacher I ever had. I always assumed that so-called โgreatโ literature was a hoax, a punishment inflicted upon adolescents for the crime of being young. These books did not have anything special about them, and covering up that fact was simply a make-work exercise for former English majors, a sort of โjobs for snobsโ program.
I was wrong about this. There is such thing as greatness. More specifically, there is such thing as thickness. Great works of fictionโfor that matter, great works of any artโunfurl in response to your attention. The more time you spend with them, the more you get out of them. That kind of responsiveness is so addicting that it can lead people to do crazy things, like try to teach literature to high schoolers.
But thickness is tricky, because rewarding the careful reader often means repelling the casual one. And this is where I would like an apology in return from my English teachers, because while this might have been obvious to them, they never made it obvious to me.
I was presented with art and literature as if it was self-explanatory, and that everything wonderful about it was plainly visible from the outside. But those works were much more like dark, winding caves with treasure stashed inside of them. My teachers were like, โRight, well, into the cave you go!โ and I was like โBut thereโs nothing in thereโ and they were like โEntering the cave is 30% of your gradeโ and so I took a few steps into the darkness and I was like โJust as I suspected: an empty caveโ and then I came trudging back out and pretended that I saw something.
It goes on to describe spectacular examples of โthicknessโ. You wonโt want to miss the The Garden of Earthly Delights painting and its unintended invitation to hear โbutt musicโ.
Adam presents 4 qualities that make something thick with examples from a childrenโs book, the โearsโ in Hamlet, and Penn (of Penn and Teller fame) eating fire.
Thereโs an amazing takedown of what passes for popular non-fiction.:
Reading a book like this feels like wandering through a Potemkin village. Touch any of the ideas, and they tip over.
He contrasts gilded examples of non-fiction with solid gold:
Thickness comes from surfacing a few facts well, and in such a way that you realize the existence of entire universes of additional facts that could be knownโฆ.[Jane Jacobs book] is pointing out a fact that millions of people observe every day, but almost none of them notice.
He addresses an easily anticipated objection which if youโll be familiar with if you have read any of deBoer on โpoptimismโ:
If you allow for the existence of secret treasures that can only be accessed with effort and analysis, then you empower the elitists and the snobs. โBuddy, donโt even talk to me until youโve been in the cave!โ
But look around. The snobs are in full retreat. We have swung the pendulum so far toward poptimism, toward the blinkered idea that all art is equal because all humans are equal, toward the ethos that guilty pleasures are simply pleasures, that Iโm not sure if we can ever swing it back.
And finally, Adam addresses the elephant:
Erasing the line between the thick and the thin has left us defenseless against slop at the exact moment of its onslaught. Everyone can sense thereโs something amiss with the prose that comes out of the machines, but we lack the language to talk about it, and so weโve converged on the idea that slop simply means using too many em dashes, bullet points, and line breaks.
What separates substance from slop is thickness. Slop holds no secrets; it signifies nothing. Under scrutiny, it evaporates. All it can offer is bottomlessnessโsure, thereโs nothing on, but at least there are infinite channels!
Thatโs why Iโm neither surprised nor dismayed when studies find that people prefer AI art to human art. Of course they do! In the short term, thinness prevails. When people are making snap judgments, they want pretty flowers, poems that rhyme, pleasing pablum, the simulacrum of thought. But none of these lastโฆ
About once a week, I get a pitch from some AI startup that wants to automate some part of my writing. The most recent one says itโs โbuilt for credible thinkers who have a bookโs worth of ideas but not the time it typically takes to write oneโ.
Iโm sorry, but if youโre building or using a tool like this, then youโve got slop for brains. There is no such thing as having a โbookโs worth of ideasโ that are all ready to go except for the small matter of choosing the right words and putting them in the right order.
I know exactly the feeling that these slop-trepeneurs are preying on, because I feel it all the time: Iโve got these thoughts in my head, and boy oh boy theyโre good ones, all-timers, really, and itโs so annoying that I have to spend all this time making the words sound good, when the ideas behind the words are already so good!
But this is an illusion. The ideas are not already good. They need to be thickened. I understand why itโs tempting to force a machine do the hard part for you, but it canโt, and the hard part is the only part worth doing anyway.
My second favorite thing after a piece of art, writing, music, movie, and sport that I love is watching someone else gush over things they love. Itโs why the Lost in Vegas guys are so endearing, especially when the channel first started. You were watching hip-hop heads not only discover but unpeel the layers in Toolโs music.
One of my dad friends recently bought a 1979 Jeep to restore with his son and asked if my son Zak (13) would like to help. Zakโs โhell yeaโ beat the sound of my last syllable when I asked him. He started watching YouTube, and we landed on a channel where these obsessed details comb the U.S. looking for โbarn findsโ to clean for the owners. For free! Itโs free because the channel has almost 2 million subscribers clamoring to watch an impossible cleaning.
I watched a few videos. I get it. Renewal of beauty, just like the objects of renewal never goes out of style. The process is as timelessly rewarding as the result.
Caitlinโs tweet is an appeal to our spirit of obsession and craft.
This essay not only feels good but is an important lens on the fast-approaching experiment of whether infinite electric monkeys will pound out Shakespeare.
Normally I might apologize for extensive excerpting but they are the point. I can do no better than this.
It opens:
I owe an apology to every English teacher I ever had. I always assumed that so-called โgreatโ literature was a hoax, a punishment inflicted upon adolescents for the crime of being young. These books did not have anything special about them, and covering up that fact was simply a make-work exercise for former English majors, a sort of โjobs for snobsโ program.
I was wrong about this. There is such thing as greatness. More specifically, there is such thing as thickness. Great works of fictionโfor that matter, great works of any artโunfurl in response to your attention. The more time you spend with them, the more you get out of them. That kind of responsiveness is so addicting that it can lead people to do crazy things, like try to teach literature to high schoolers.
But thickness is tricky, because rewarding the careful reader often means repelling the casual one. And this is where I would like an apology in return from my English teachers, because while this might have been obvious to them, they never made it obvious to me.
I was presented with art and literature as if it was self-explanatory, and that everything wonderful about it was plainly visible from the outside. But those works were much more like dark, winding caves with treasure stashed inside of them. My teachers were like, โRight, well, into the cave you go!โ and I was like โBut thereโs nothing in thereโ and they were like โEntering the cave is 30% of your gradeโ and so I took a few steps into the darkness and I was like โJust as I suspected: an empty caveโ and then I came trudging back out and pretended that I saw something.
It goes on to describe spectacular examples of โthicknessโ. You wonโt want to miss the The Garden of Earthly Delights painting and its unintended invitation to hear โbutt musicโ.
Adam presents 4 qualities that make something thick with examples from a childrenโs book, the โearsโ in Hamlet, and Penn (of Penn and Teller fame) eating fire.
Thereโs an amazing takedown of what passes for popular non-fiction.:
Reading a book like this feels like wandering through a Potemkin village. Touch any of the ideas, and they tip over.
He contrasts gilded examples of non-fiction with solid gold:
Thickness comes from surfacing a few facts well, and in such a way that you realize the existence of entire universes of additional facts that could be knownโฆ.[Jane Jacobs book] is pointing out a fact that millions of people observe every day, but almost none of them notice.
He addresses an easily anticipated objection, which youโll be familiar with if you have read any of deBoer on โpoptimismโ:
If you allow for the existence of secret treasures that can only be accessed with effort and analysis, then you empower the elitists and the snobs. โBuddy, donโt even talk to me until youโve been in the cave!โ
But look around. The snobs are in full retreat. We have swung the pendulum so far toward poptimism, toward the blinkered idea that all art is equal because all humans are equal, toward the ethos that guilty pleasures are simply pleasures, that Iโm not sure if we can ever swing it back.
And finally, Adam addresses the elephant:
Erasing the line between the thick and the thin has left us defenseless against slop at the exact moment of its onslaught. Everyone can sense thereโs something amiss with the prose that comes out of the machines, but we lack the language to talk about it, and so weโve converged on the idea that slop simply means using too many em dashes, bullet points, and line breaks.
What separates substance from slop is thickness. Slop holds no secrets; it signifies nothing. Under scrutiny, it evaporates. All it can offer is bottomlessnessโsure, thereโs nothing on, but at least there are infinite channels!
Thatโs why Iโm neither surprised nor dismayed when studies find that people prefer AI art to human art. Of course they do! In the short term, thinness prevails. When people are making snap judgments, they want pretty flowers, poems that rhyme, pleasing pablum, the simulacrum of thought. But none of these lastโฆ
About once a week, I get a pitch from some AI startup that wants to automate some part of my writing. The most recent one says itโs โbuilt for credible thinkers who have a bookโs worth of ideas but not the time it typically takes to write oneโ.
Iโm sorry, but if youโre building or using a tool like this, then youโve got slop for brains. There is no such thing as having a โbookโs worth of ideasโ that are all ready to go except for the small matter of choosing the right words and putting them in the right order.
I know exactly the feeling that these slop-trepeneurs are preying on, because I feel it all the time: Iโve got these thoughts in my head, and boy oh boy theyโre good ones, all-timers, really, and itโs so annoying that I have to spend all this time making the words sound good, when the ideas behind the words are already so good!
But this is an illusion. The ideas are not already good. They need to be thickened. I understand why itโs tempting to force a machine do the hard part for you, but it canโt, and the hard part is the only part worth doing anyway.
Money Angle
People seemed to like the post I wrote 2 weeks ago teaching readers how to compute Kelly optimal bet sizes in their heads. A lot of people reached out saying that despite learning Kelly in the past, this treatment not only made it clearer but also helped them appreciate how its approach informs risk-taking in wider contexts.
Panoptica graciously asked me to republish it under their own banner:
After this post you will be sizing bets in your head (Panoptica)
Just to put a bow on it, Iโll restate what I think are the most crucial lessons without dwelling on the formula:
Even educated people are terrible at sizing bets. Itโs not because itโs so complex, but I guess itโs like squatting. It seems like you should just know how to do it, but itโs actually something you need to learn the mechanics of.
Overbetting is incinerating money. This is something thatโs hard to appreciate until you see the math. The reason you size smaller is because of the asymmetry of being wrong on your edge. If you underbet, you slow your growth rate but slow risk even faster. At least you’re exchanging lower returns for a better risk/reward. But if you overbet, you lower your growth rate AND increase your risk even faster than you reduce your reward. Both the numerator and denominator of your risk/reward move in the wrong directions!
If interested, Matt does this neat meta series “Notes on Notes”. It’s a short chat about how and why a particular article comes together in the first place. You can watch it here:
To round out this Kelly sprint, I have 2 more bits that are again overtures to curious learners who may find math intimidating.
1) Slides
The first is a condensed slide version, which I hope makes this accessible. It was born out of teaching Kelly to my 8th grader at breakfast this past Tuesday. โZak, I wanna see if I can teach you something neat in 5 minutes.โ He rolled his eyes, but at least he humored me while scarfing down his cereal.
The derivation of the Kelly formula is so fun because as it rolls downhill, a number of concepts we talk about in this letter stick to it, so when we get to the end it feels like something grand, but itโs so damn compact.
Another teaching experiment. Letโs see if I can narrate the derivation in a way so that as you follow along it never feels โhardโ. I want to prove that this is fun to do and while I donโt expect to convert everyone, I do think thereโs a bunch of you whoโd like to be able to learn this but feel blocked because you have gaps in your foundations or canโt remember HS math, or just lack some confidence.
Screw all that, Iโll lay my jacket over the puddles so you can see that itโs not so bad out here. Just come along.
Money Angle For Masochists
Deriving Kelly From Scratch
Stating the question
You have a bet. You win with probability p and lose with probability q = 1 โ p. If you win, you get paid B times what you risked. If you lose, you lose what you risked. B is also just a return. So if you double your money on a bet, B=1=100% return.
Youโre going to bet the same fraction f of your bankroll every time and let it ride.
Whatโs the f that yields the highest compounded return?
Step 1: What one bet does to your wealth
If your wealth is W and you bet the fraction f:
Win: W โ W(1 + Bf) Lose: W โ W(1 โ f)
Example:
Your starting wealth is $100 and you bet 50% of it on a coin flip. Remember B =1 because when you win you make 100%. When you lose you always lose f which is your bet size.
Wโ is where you end up. We want a per-bet growth rate.
You already know how to do this. If an investment grew by a factor of (1 + 8%)ยนโฐ over 10 years, you take the 10th root to get the CAGR back. Same move here: take the nth root of this equation: Wโ = Wโ(1 + Bf)สฐ(1 โ f)โฟโปสฐ
Note that Wโ can be divided out, just as if your starting identity was 150 = 100(1+8%)ยนโฐ and you turned that into 1.5 = 1.08ยนโฐ before taking the 10th root to get to annual growth rate.
This equation took our simple total growth equation and turned it into a growth rate equation:
Step 4: Let probabilities take over
We can clean up our new growth equation with several handy notation substitutions.
Ps and Qs
h/n is the share of bets won
(n-h)/n is the share of bets lost
Over a long run, the fraction of bets you win settles down to your win probability:
h/n โ p and (n โ h)/n โ q
G
Wโ/Wโ is just a wealth multiple. If you made 200% on your investment portfolio over a decade, your wealth multiple is 3 because you started with $1 and ended up with $3.
Weโll call that wealth multiple G (for โgross multipleโ)
So the per-bet growth factor becomes:
G = (1 + Bf)แต(1 โ f)แซ
G = 1.05 means your bankroll grows 5% per bet on a compounded basis. In traditional investing, weโd substitute the word โyearโ for โbetโ. Each flip is like a year.
Our job is to find the f that makes G (the gross multiple of our wealth) as big as possible.
Step 5: Take the log to make the math easy
Maximizing G means taking its derivative with respect to f and setting it to zero.
when someone says โderivativeโ
Itโs 2026, you donโt need to know how to actually differentiate an equation. You just have to awaken that part of your brain that knows:
a) a derivative is the slope of a function at a given point on a curve
b) when the slope of a curve is 0 this is a maximum or minimum
c) intuitively, we can reason that this is a growth curve is a hill with no bumps. Its slope starts positive and only ever gets smaller as you bet more, so it can hit zero exactly once, and when it does, youโre at the top. (the jargon version: this growth curve is concave: it bends downward everywhere from the max, with no inflection points)
We are still here:
G = (1 + Bf)แต(1 โ f)แซ
But G is a product of powers, which is nasty to differentiate.
But remember from simple pleasures, logs fix this. They are the inverse of exponentiation, allowing them to turn multiplication into addition!
They pull exponents down in front: log(xแต) = p ยท log(x).
We can prep that equation for differentiation by taking the log of both sides and using both of those sexy log features:
log(G) = p ยท log(1 + Bf) + q ยท log(1 โ f)
Maximizing log(G) gives the same f as maximizing G, because log always rises when its input rises.
rapidtables.com
Thereโs another little bonus.
Log(G) is the log return per bet, the same quantity as ln(Sโ/Sโ).
It re-expresses a compounded, multiplicative growth factor as a continuously compounded rate, and rates add cleanly.
Step 6: Differentiate and set to zero
Once you know this is a derivative problem because you are trying to maximize then we can rely on crutches (Claude) for thing thatโs hard to remember.
Namely that:
the derivative of log(x) is 1/x.
If thereโs something inside the log, also multiply by the derivative of that inside piece (the chain rule)
So we have our equation:
log(G) = p ยท log(1 + Bf) + q ยท log(1 โ f)
then we differentiate our terms to be added with respect to f:
p ยท log(1 + Bf) โ pB/(1 + Bf) (the inside, 1 + Bf, has derivative B)
q ยท log(1 โ f) โ โq/(1 โ f) (the inside, 1 โ f, has derivative โ1)
Set the sum equal to zero, which is where the growth curve is flat at its peak:
pB/(1 + Bf) โ q/(1 โ f) = 0
Step 7: Solve for f
Move the second term across and cross-multiply:
pB(1 โ f) = q(1 + Bf)
pB โ pBf = q + qBf
pB โ q = pBf + qBf
pB โ q = Bf(p + q)
But donโt turn your pattern recognition noggin off!
Since p + q = 1, this collapses to:
f = (pB โ q) / B
f = p โ q / B
Can you reproduce this right now on a blank sheet of paper?* Probably not. But go through it once the way you used to trace when you learned the motions for drawing comic book characters or flowers or in my case TMNT. After a single reproduction by hand, I assure you some neural pathways will re-open that have had construction signs in front of them for years.
And to tie this back to the beginning, that is the joy of thickness.
[Get your mind back over here, this is a family letter.]
*You will be able to reproduce it on your own after 2 or 3 attempts. I donโt know why the motion of the pencil is a 10x better instructor than reading it a bunch of times (generation effect maybe?). But this is one of those learning principles I take seriously and impress on my kids.
The world will seduce you with ease where youโd be better served by friction. It is a 21st-century skill to have a point of view on the difference.
Alex is an options trader you should follow in case he ever tweets a lot. Because he doesnโt, when he posted the question below a year ago, it got few responses. I took the liberty of posting it myself this week.
This was fun because it led to a lot of discussion on the timeline and DMs. I was told it sparked a bunch of quant debate on one traderโs desk.
The most popular answer, which was still less than 1/3 of the responses, was the correct answer.
Why?
The maximum value of a put is the strike. The maximum value of a call is the stock price.
Straddle is C + P so $100+$100 = $200
Notice how this means all call spreads go to zero since the calls are worth the same โ the stock price. All put spreads go to their max valueโ the distance between strikes because the puts themselves are worth the strikes.
Logic for delta:
Delta is the change in option price per change in stock.
But the putโs strike is fixed, so the value of the put doesnโt depend on the stock price. The put has zero delta. Itโs always worth $100. Which means it has no gamma either
The call is $100 because the max value of the call is the stock price. The call value moves 1-to-1 with the stock, so it has a delta of 1 or 100%
The max value of a straddle is therefore the stock price plus the strike price.
If you sell the straddle or either option at max value and hedge on its delta one time (this is known as a static hedge in contrast to dynamic hedging where you would rebalance as your hedge ratio changes), you cannot lose. It is that simple fact of arbitrage that makes it the upper bound.
To address the second most popular response in the poll, those who said the straddle is $100 (wrong) and has a 1.00 delta (correct), we will demonstrate why this is incorrect.
Whatโs your p/l if you sell 1 straddle at $100 and buy 100 shares against, if the stock goes to $300?
The straddle will be worth $400, so you lose $300 but make $200 on your long share.
Hmm, maybe Iโm just underhedged. Fine, what if I hedge on a 200 delta?
In that case, you actually make money; you win $400 on your 2 shares more than offsetting the $300 straddle loss. But what if the stock went to zero?
Your straddle p/l is unchanged, but you lost $200 on the long stock position. Arbitrage max value means you cannot lose if you sell at that price. Since we found a losing scenario, the price is not the maximum arbitrage bound. If you sell the straddle at $200 and buy a single share of stock, thereโs no scenario where you lose. It is the lowest straddle value for which this no-lose scenario is true, thus itโs the arbitrage bound.
Of course, this is but a toy problem where the call and put go to their maximum values because itโs a degenerate case of infinite time or vol. But learning how a function (an option price is just a function) behaves by observing its boundaries is good for intuition. You did this in 9th grade. Khan Academy can jog your memory:
In the real world, you can fleetingly find options that trade beyond their arbitrage values:
Earlier in the week, @DeepDishEnjoyer aka p4 wrote a thread about a dividend mispricing.
It led to some back and forth with passersbys who use options but appear to have large gaps in the fundamentals.
Between the maximum value poll and p4โs dividend lesson, itโs worth saying it:
In a proper option education, you spend a lot of time on arbitrage relationships, cost of carry, and synthetics before you ever hear the word โvolatilityโ.
I didnโt study formal math but I imagine thereโs a lot in common with the process of proofs. Arbitrages rest heavily on assumptions. So to understand the relationships, you are forced into an intimate familiarity with the assumptions. And in the extremes of everything, itโs the failure to examine assumptions that leads to being blindsided. But also, when things get extreme, to go on the attack means asking yourself, โWhoโs on autopilot? Is this price resting on a stale assumption?โ The arbitrage relationships give you the highest conceptual ROI that derivatives offer, you never learn the most useful thing derivatives can teachโฆpassage over the โbridge of assesโ.
If you want to see more examples of why option basics are so key to understanding assumptions and opportunities when things get weird:
My cousin Nicole just had her first child in the past year and is now compiling resources for new parents in light of where her attention has obviously been.
In our family chat, she asked:
When you became a new parent, what blindsided you the most?
Iโll share my answer, which I qualify with both the awareness that having a child is a gamble on many levels and that conception itself is a miracle and should never be taken for granted. What was I blindsided by?
[9:16 AM, 9/16/2026] Kris Abdelmessih: that they were gonna be so awesome
[9:17 AM, 9/16/2026] Kris Abdelmessih: that last one is important when we live in times where people have less kids and talk about it as though itโs a chore (it is) but not the amazing upside
The most transcendent single moment of my life thus far was to hear my sonโs voice the day he came into the world. I donโt know if thatโs every parentโs experience, but immediately I felt the joy and clarity of purpose. Before that cry, I donโt think I would have said I had no purpose, but the moment revealed that I didnโt believe I did. The speed and intensity of this rush of belief was a novel feeling. Thus, irreparably blindsided.
Share your own answers in the comments and Iโll share them with Nicole. Thank you!
I offered a couple of less serious answers to her question as well.
When I was at the Sphere with my family over Spring Break, I wouldnโt ride the long, exposed escalators. I took the elevator where I found the rest of the scaredy-cats.
If thereโs anything good about having a phobia, itโs empathy for the range of what can go on in peopleโs minds and bodies.
Iโm watching this poor guy thinking, donโt do it man, itโs not worth and all he wants is a glimpse:
The comment section understands, and based on the number of โlikesโ, many others do too.
Anyway, I blame my kids for my embarrassment when I go to the Sphere to see Metallica with a group of guys next month and have to explain that Iโll meet them at the seats.
My cousin Nicole just had her first child in the past year and is now compiling resources for new parents in light of where her attention has obviously been.
In our family chat, she asked:
When you became a new parent, what blindsided you the most?
Iโll share my answer, which I qualify with both the awareness that having a child is a gamble on many levels and that conception itself is a miracle and should never be taken for granted. What was I blindsided by?
[9:16 AM, 9/16/2026] Kris Abdelmessih: that they were gonna be so awesome
[9:17 AM, 9/16/2026] Kris Abdelmessih: that last one is important when we live in times where people have less kids and talk about it as though itโs a chore (it is) but not the amazing upside
The most transcendent single moment of my life thus far was to hear my sonโs voice the day he came into the world. I donโt know if thatโs every parentโs experience, but immediately I felt the joy and clarity of purpose. Before that cry, I donโt think I would have said I had no purpose, but the moment revealed that I didnโt believe I did. The speed and intensity of this rush of belief was a novel feeling. Thus, irreparably blindsided.
Share your own answers in the comments and Iโll share them with Nicole. Thank you!
I offered a couple of less serious answers to her question as well.
When I was at the Sphere with my family over Spring Break, I wouldnโt ride the long, exposed escalators. I took the elevator where I found the rest of the scaredy-cats.
If thereโs anything good about having a phobia, itโs empathy for the range of what can go on in peopleโs minds and bodies.
Iโm watching this poor guy thinking, donโt do it man, itโs not worth and all he wants is a glimpse:
The comment section understands, and based on the number of โlikesโ, many others do too.
Anyway, I blame my kids for my embarrassment when I go to the Sphere to see Metallica with a group of guys next month and have to explain that Iโll meet them at the seats.
Money Angle
A couple of Option Trench episodes to share:
๐บTerminal vs Path-Dependent Value Explained Using Collars | 39 min
๐บThe (Not So) Efficient Market Hypothesis? | 59 min
The first one will be useful for anyone wanting to learn more about option collars, which Iโve been writing a lot about. A video might be a gentler format so check that out.
The second one applies to investing broadly. I also use the Paradox of Provable Alpha at the end to answer a good question Erik asks.
Money Angle For Masochists
Alex is an options trader you should follow in case he ever tweets a lot. Because he doesnโt, when he posted the question below a year ago, it got few responses. I took the liberty of posting it myself this week.
This was fun because it led to a lot of discussion on the timeline and DMs. I was told it sparked a bunch of quant debate on one traderโs desk.
The most popular answer, which was still less than 1/3 of the responses, was the correct answer.
Why?
The maximum value of a put is the strike. The maximum value of a call is the stock price.
Straddle is C + P so $100+$100 = $200
Notice how this means all call spreads go to zero since the calls are worth the same โ the stock price. All put spreads go to their max valueโ the distance between strikes because the puts themselves are worth the strikes.
Logic for delta:
Delta is the change in option price per change in stock.
But the putโs strike is fixed, so the value of the put doesnโt depend on the stock price. The put has zero delta. Itโs always worth $100. Which means it has no gamma either ๐
The call is $100 because the max value of the call is the stock price. The call value moves 1-to-1 with the stock, so it has a delta of 1 or 100%
The max value of a straddle is therefore the stock price plus the strike price.
If you sell the straddle or either option at max value and hedge on its delta one time (this is known as a static hedge in contrast to dynamic hedging where you would rebalance as your hedge ratio changes), you cannot lose. It is that simple fact of arbitrage that makes it the upper bound.
To address the second most popular response in the poll, those who said the straddle is $100 (wrong) and has a 1.00 delta (correct), we will demonstrate why this is incorrect.
Whatโs your p/l if you sell 1 straddle at $100 and buy 100 shares against, if the stock goes to $300?
The straddle will be worth $400, so you lose $300 but make $200 on your long share.
Hmm, maybe Iโm just underhedged. Fine, what if I hedge on a 200 delta?
In that case, you actually make money; you win $400 on your 2 shares more than offsetting the $300 straddle loss. But what if the stock went to zero?
Your straddle p/l is unchanged, but you lost $200 on the long stock position. Arbitrage max value means you cannot lose if you sell at that price. Since we found a losing scenario, the price is not the maximum arbitrage bound. If you sell the straddle at $200 and buy a single share of stock, thereโs no scenario where you lose. It is the lowest straddle value for which this no-lose scenario is true, thus itโs the arbitrage bound.
Of course, this is but a toy problem where the call and put go to their maximum values because itโs a degenerate case of infinite time or vol. But learning how a function (an option price is just a function) behaves by observing its boundaries is good for intuition. You did this in 9th grade. Khan Academy can jog your memory:
In the real world, you can fleetingly find options that trade beyond their arbitrage values:
Earlier in the week, @DeepDishEnjoyer aka p4 wrote a thread about a dividend mispricing.
It led to some back and forth with passersbys who use options but appear to have large gaps in the fundamentals.
Between the maximum value poll and p4โs dividend lesson, itโs worth saying it:
In a proper option education, you spend a lot of time on arbitrage relationships, cost of carry, and synthetics before you ever hear the word “volatility”.
I didnโt study formal math but I imagine thereโs a lot in common with the process of proofs. Arbitrages rest heavily on assumptions. So to understand the relationships, you are forced into an intimate familiarity with the assumptions. And in the extremes of everything, itโs the failure to examine assumptions that leads to being blindsided. But also, when things get extreme, to go on the attack means asking yourself, โWhoโs on autopilot? Is this price resting on a stale assumption?โ The arbitrage relationships give you the highest conceptual ROI that derivatives offer, you never learn the most useful thing derivatives can teachโฆpassage over the “bridge of asses”.
If you want to see more examples of why option basics are so key to understanding assumptions and opportunities when things get weird:
I leave you with another pic from our family chat where my wife posted a photo of where she was walking.
I donโt know how many Egyptian Arabic speakers we got in the crowd but โshib-shibโ is like a slipper. Momโs weapon of choice. Apparently this is a broader thing:
