A few quick hits to start
Welcome to Scamerica
I remember on the NYMEX, when certain brokers would mosey into the pit you’d literally hear someone say “watch your wallet”.
Well, here’s a new product from fintwit’s philosopher king:
My reflex was “Hey, here’s another fund using retail marks as exit liquidity before they can stuff the indexes with their low-float IPOs at mature, expensive growth valuations.” Thanks for the look Mr. Positive-Sum Game Preacher.
My expectations are so low for anything sold by the VC crowd on socials, but I still try to be charitable. Like, fine, give people what they want. You’re dying to pay trillion-dollar valuations in a one-way auction (see a recipe for overpaying), someone is going to broker it. Since it’s private and requires herding retail cats, it’s going to be pricey.
I also recognize I’m biased towards cynicism because when it comes to any match-making in finance. It’s a bazaar loaded with adverse selection because there’s so much info asymmetry and persuasive marketing within a competitive landscape that pretty much assures most of its emperors to be sociopaths.
But fine. It’s a market. It’s 2026. I’m inured against disappointment. In fact, flip it. The more fun game is to watch the limbo. How low we gonna go? Bro’s shoulder blades are grazing the turf. See the tweet:
Shout out to these guys for reading the fine print or at least feeding it to Claude. Oh the irony of using LLMs created by the companies in the fund to ask “read this prospectus and tell me all the ways I’m being bent over”.
Speaking of LLMs…
The agent craze has been amazing for getting things done, but in the past week I’ve needed to go back to the classic AI use — research.
A good friend from my local in-person life is raising a few hundred grand to grow a business he started a year ago that’s getting awesome traction. It started with him looking for a local business to buy but ended up with him starting one from scratch. It’s not a venture-shaped business and makes more sense for friends and family, so I am looking at it.
Over the years, I’ve invested in some private stuff friends have done, like restaurants or real estate deals. Some go well, some don’t. Honestly, the whole endeavor doesn’t feel like a great use of time so I’m definitely more disciplined about this stuff, but also I know I have so much to learn about business in general.
I have uselessly broad heuristics. SaaS is high margin. Packaged goods are about distribution. Bars are for vanity. I have a superficial understanding of accounting and financial statements from reading a couple books. But I do like looking at spreadsheets and following the cells to see the levers and sensitivities. It feels like a game.
And I took more interest in this exercise this time around as I looked through my friend’s financials for the past year and the model he built for projections and tracking. I think the extra interest is at least partly because of having to learn more about investing fundamentals for the class I do for the teens, but also because there’s so much less friction in learning.
For example, as I study his business, I can see how the gross margin shrinks down to the contribution margin and finally to a net margin. But then you wonder, how does this progression work in various business models? What are the typical ranges of relationships between the numbers across industries?
The questions come alive when you start from the specific, like a company you are studying, and then zoom out for perspective. You have to spend time on the company to start, but if you don’t have a background in banking, corporate finance, or accounting, you now have to build context. But this is where the LLM comes in. Especially the “deep research” or equivalent setting on whichever you use. The visibility of sources is an effective audit against hallucinations. And voila, you send it to work for an hour and you have a relevant book report customized to your practical interest.
I found its output satisfyingly illuminating for my purpose:
Contribution Margin Vs Net Margin: What Gets Lost Between The Two
My delight with that one renewed my interest in a book I printed out many years ago but never got around to reading:
The Base Rate Book Michael Mauboussin
I, of course, had the LLM create a summary with my interests in mind.
Again, more context for understanding business. On the one hand, stuff like this is high-level enough to only make you dangerous, but you have to build a sense of proportion and, well, base rates to relate narrow explorations, like that of an individual business, to enterprise broadly.
A word on AI book reports
I subscribe to a lot of quant finance substacks. I don’t read them all but the cost of triage with AI summary abilities is so cheap now.
But this is the mirror of the cheapness to produce as well. I have noticed that a lot of substacks with a premium tier are really just baity book reports about trading firms. Like long versions of twitter slop threads which are proven methods for building audiences.
I don’t want to be too negative about them since they do synthesize high-level information at slightly higher than replacement value than what you could wrangle out of an LLM. I usually don’t pay for them because they lack a sharp “point of view”. And even if they do, if it’s hard to tell if it’s an earned one, then it probably isn’t. God knows we’re awash in baseless points of view in general and that’s on the benign side of the spectrum, opposite rage-bait or doomer copywriting predation models.
I don’t have a grand opinion here, but I’m confident the future is going to be a lot more of your AI reading someone else’s AI-produced writing, at least in the world of non-fiction. Our relationship to reading is going to change and the role of email in that world will also transform. I need to think about this a lot more. My bet is that retaining a voice matters. The question is whether it matters the same way live music matters or if it’s looked at the way we see an artisan who makes their own furniture. Pure soulcraft.
Back to practical matters
In professional trading, there are critical functions that are abstracted away from your day-to-day job which cannot be if you are independent. A good example of this is the topic of margin.
If you run a strategy that is relatively small compared to your entire fund or firm so long as your haircut is commensurate with the opportunity size of your specific business, you likely don’t even know what it is. From your point of view, you’re trading with a blank check so long as you are within risk limits. Margin risk is monitored and managed a layer up from market risk which you are keenly aware of.
I’ve discussed this before in When it’s normal to have no idea what your returns are.
On the other hand, experienced retail traders understand margin inside out because it’s a matter of survival. Some retail traders understand it so well I think the margin sometimes wags the trading dog where instead of starting with an edge they start with what is margin efficient.
Margin and options is complicated topic and one I’ve been overdue on diving into. I put together a guide to understanding option margin, shorting details, and Interactive Brokers specifically since that’s my primary broker.
I host this on my Notion site. I used ChatGPT ‘deep research’ to do, well, the research then steered it into a reference, but something that should be read all the way through. Margin isn’t a fun topic but ultimately this is about risk.
Margin, Explained: Reg T vs Portfolio Margin, and Why IBKR Is a Different Animal
What you’ll find:
- Detailed look at both Reg T and Portfolio Margin (PM)
- A side-by-side summary of the key differences
- How each framework can hurt you in ways the other can’t
- Who each framework is actually best for
- How Interactive Brokers (IBKR) implements all of this differently from other brokers
- Short selling mechanics — borrow, SYEP, rebates — where IBKR is the unique retail player
- A glossary of the IBKR-specific metrics that actually matter (NLV, ELV, SMA, SEM, Excess Liquidity)
A few topics in here that were especially enlightening to me, often because they were discussed by different names than I’m familiar with or were not an issue in a professional setting.
Expiration risk
The first one here is one you will not encounter if you work for a firm but is dangerous for an individual. The idea that you can be liquidated on a long option! This scenario was one of the reasons I prioritized this article. A mutual on Twitter had this happen to them and discussed it on the timeline. There was a pile-on of “duh” but that risk is not something I’d necessarily focus on. Now I know better.
It’s an interesting risk because it creates a meaningful limit to how levered you can be on a long option position whose premium you can afford. For example, if you have a big chunk of your account in small delta puts that actually hit, you will likely need to roll or close before expiry and must be ready to trade.
- IBKR runs expiration exposure simulations and may liquidate options before expiration if the projected post-expiry exposure is deemed excessive. Pre-expiration liquidations typically happen expiration day afternoon, sometimes earlier. IBKR may also lapse long ITM options that would otherwise auto-exercise if exercising would breach margin.
- The truly dangerous case: early assignment on the short leg of a spread. IBKR will not automatically exercise your long leg to cover. Short put assigned Friday night → stock position Saturday morning. If you lack margin for that stock position, IBKR begins liquidating Monday at ~9:40 AM ET, and may liquidate any position in the account, not just the assigned shares. There are multiple documented six-figure retail blowups from exactly this.
Short selling
IB lets you lend your shares through its Stock Yield Enhancement Program (SYEP). You and IB split the lending fee charged to the borrower. But there are risks I didn’t know about:
- Loss of SIPC protection on lent shares. IBKR posts Treasury/cash collateral as a substitute, but in an IBKR default, this is your only recourse.
- Payment in lieu of dividends (PIL) when shares are on loan over ex-date: taxed as ordinary income (1099-MISC), not qualified dividend rates (1099-DIV). Practitioners report 50–60% of dividends received as PIL rather than qualified — tax disaster for dividend-focused portfolios.
IB’s advantage over many other brokers is that they pay you interest on the cash from the short sale proceeds (I was relieved to see that IB calls it what I’ve always known it as — the “short stock rebate”). The rebate is not as generous as what you get institutionally but it’s better than I got when I had a backer!
Final thought
The guide is critical for parsing whether you want to be in a portfolio margin or Reg-T margin account.
Unlike most Thursday posts, this one has a good chance of being more enlightening for professional options traders than retail option traders!