My wife Yinh pinged Khe to see if he’d host a seminar for people interested in getting more mileage out of AI. He agreed (and texted me separately with “I’m sure you know this already, but your wife is a force of nature”…Oh, I’m quite aware).

She emails 60 friends and associates, inviting them to this session. She got 40 affirmatives by the next time she checked her email. As she told me by text, “everyone feels like a boomer”.

I’m not going to spend time speculating on AI futures but it’s hard to not realize that sources of value are shifting beneath our feet. AI could have written a lot of my technical posts. It wouldn’t have been in my voice, and insofar as my written voice has some entertainment or organic attraction, it’s not the same quality. But it would convey much of the instrumental information content and at far lower cost.

To paraphrase a tweet I can’t find anymore (I gave Grok 2 chances but no dice) from a lifelong software developer: I used to pride myself on solving tricky problems and finding elegant solutions and watching LLMs do this instantly has rattled my sense of self-worth.

A lot of value-added work in the past is commoditized. Without speculating on futures, I only invite you to prompt yourself, “how much of the work I do is truly unique?”

There’s an ongoing whole layer of AI-enabled automation creep that we’ll embrace, I’m not talking about that.

Aside: The latest one I’ve appreciated is the Gemini summaries that sit on top of long email threads:

I’m talking about the increasing automation of formerly complex tasks that we actually hang our hats on. My voice is the organic part of the writing. But what’s that even worth relative to the content? A doctor’s job is a mix of inference and bedside manner. What’s the relative value of these things? If you are in sales, how much of your cycle has to do with trust and a firm handshake versus data persuasion and storytelling. What will AI lower the cost of, not just for you, but for competitors? It’s the Innovator’s Dilemma in homine.

You squeeze one part of the balloon and the air bulges into another part. It’s like the “commoditize the complement” thinking in product strategy.

This article by Jon Matzner is a good example of updating your models hard in the face of re-structured inputs:

The Only Cost I Want to Go Up

Where does the value go? What are your sunk costs? What is a trapped asset or idea that is now tenable? These types of questions were always relevant, but the speed at which they are coming at us in a wide-open frontier is only precedented at major inflections of general-purpose technology. A relatively recent example on the timeline of innovation is Netflix knowing long before it became a streaming-first company that streaming was the future, but broadband needed to catch up. The AI inflection is a confusing sandstorm rapidly covering old monuments while revealing new spaces to build. Anyone paying attention can feel it. Hence, the FOMO response to Yinh’s email.

---

A couple weeks ago, in work is going to feel very different by next Christmas, I said I’d share some of the things I’m doing with AI. For example:

I can write a description of a bug in Linear or Jira (who am I kidding — I upload a screenshot with a blurb and have AI write a detailed bug spec complete with testing protocol) and assign it to…”Claude bot”. A dev approves the change. Push to prod.

Tools I use

1. Claude Code with Opus 4.5 on a Max plan ($100/m)
2. Gemini Pro ($16/m)
3. ChatGPT Plus ($20/m. This is really Yinh’s but I use it sometimes. Don’t tell.)
4. NotebookLM when I want an audio summary of lengthy text. Sometimes I will give it a bunch of notes and have it generate a podcast conversation about them which can help me find connections or through-lines that outlining doesn’t. Something about hearing vs hearing I guess. I could get to the same place sparring with a text-based LLM but this way I can do it while walking or in a less taxing way. Or sometimes because I need to just let some material wash over me.
5. A service (in stealth at the moment) that connects to any data source including the moontower options database that’s hyper-tuned for inference. An example I’m messing with now is something I call VCR or Variance Contribution Ratio. What percentage of the realized variance in a list of assets in some window came from N% of days. You can ask it a question like that and it will come back with all kinds of ideas, charts, insights. It’s an intern that skips the photosynthesis→food→brain power+senses drivetrain altogether and just runs on sending electricty through a recipe trained loop that our ancestors have run through many times before. Progress. Suicide. Both. I don’t know, I’m just an ape with a lever.

Comments

• I was using Terragon as an agent that can talk to my github repos as well as deploy to vercel but Claude has replaced all this workflow. Similarly, Claude has replaced my usage of Copilot in VSCode.
• I find the native MSFT Copilot in Excel to be trash. I haven’t used Claude for Excel yet. I have found the Claude Chrome extension in the browser to be helpful with Google sheets.
• More broadly, Claude and Gemini browser tools are still clunky in some contexts (“port this substack post to my wordpress site”) and useful in others especially within your email. “Give me a list of all the people who reached out asking about XYZ” or “go find the loan agreement document with entity X and compute the accrued interest according to its provisions through today”.

Silo’d projects I’m currently using AI for

As a matter of procedure, I use Projects folders within Claude to compartmentalize initiatives. You can upload lots of files to the project for context and then have a limitless number of chats within the project itself all dealing with different aspects. I like to tell Claude to consolidate what I’ve accomplished or learned from individual sessions and then I feed that back into a living document in the files section so its always handy to the bot for future chats. These documents also include feedback about directions Claude took that I didn’t like. I don’t know what reinforcement learning is mathematically but the process feels like manual training.

Here’s a few things I’m working on:

Investment Idea Generation

Agent reads investment letter email, generate a bullish/bearish template that considers the author’s sentiment, timing, etc, which can automatically be fed another agent connected to moontower.ai infra to see how it accords with option surfaces. Another agent then presents the output. In an advanced form this is becoming part of the product itself, capable of generating watchlists and so forth. (I’m more interested in the pipeline at the moment. The business end of it would be more complex since there’s author IP involved).

Status: very early…need to get email agent running

Mooncoin Option Trading game [skunkworks name for now]

This is less agentic and more LLM conversation about gameflow. However, Claude Code was integral to helping me style.

Status: Ready for a second round of playtesting to pin down the concept. Long way from a final product but can start playtesting over Zoom!

Current screenshots:

Trading Quizzes

One of my projects is setup as a RAG with about 70 articles. I’m having Claude devise interactive quizzes that give learners a chance to practice their option knowledge. Varies from beginner to more advanced.

Status: early and promising. A few rounds of iteration so far on a tranche of concepts where I’m training the LLM to know what I consider a good question. From there I will extend it to more tranches of material and if that goes well I know have a custom quiz maker for any material I give it. I’ve been heartened by some of the angles it’s taken on questions — it definitely comes up with stuff I wouldn’t have. The median quality can be higher, so still more to do. I’m not sure how much of the meta of making a good question I’m going to succeed in relaying but that’s part of the fun.

---

Money Angle

In the late aughts, one of my family members had a side-hustle while getting his Masters where he’d post ads on Craigslist offering to help people with their Excel work. People were willing to pay a lot more for this than I expected.

He told me why.

It was people who somehow ended up with Excel-heavy jobs without knowing how to use Excel. He was quite literally doing their jobs for them. In finance terms, he was the layoff account where his client was a bank trading desk arbing their customer (the employer) and he was picking up the juicy scraps.

So much for that. Anthropic just released Claude in Excel

Claude in Excel is an add-in that integrates Claude into your Excel workflow. It’s designed for professionals who work extensively with spreadsheets, particularly in financial analysis and modeling.

With Claude in Excel, you can:

With Claude in Excel, you can:

• Ask questions about your workbook and get answers with cell-level citations
• Update assumptions while preserving formula dependencies
• Debug errors and identify their root causes
• Build new models or fill existing templates
• Navigate complex multi-tab workbooks seamlessly

Money Angle For Masochists

Today is for the younger masochists (and their overseers).

I’m going to start an investment beginnings class locally. There’s a few things at the end of this section you can use. If it inspires you to do something similar or have ideas, let ‘er rip!

Around 15 people signed up. I’ll see how the experiment goes and report back as it evolves.

This is the email I sent to the families:

We recently opened up a brokerage account for our 12-year-old, Zak so he could start investing in some stocks he’s interested in. I want to give him a more structured foundation and since this scales easily to a group, I figured I’d open it up to family and friends.

What it is: A hands-on class where we learn by doing – looking up real securities, building spreadsheets, understanding how markets work, and developing the kind of financial instincts that serve you for life. The goal is to make sure participants aren’t suckers and start with good financial hygiene.

The approach: Participants will be treated as capable people who can figure things out. We will get comfortable working at the edge of what we know how to do, wherever that may be – Googling, LLM’ing, excel formulas (and we can get into heavier automation/coding if there is appetite), troubleshooting, and being resourceful. If this inspires ambition, we can go further. Other than building an object-level understanding of investing, the dual goal is to earn the type of confidence that only comes from competence and its prerequisite — persistence. This will feel harder than school.

Format: Sessions in front of a room with a projector. Each participant will need a laptop to follow along. We’ll use real tools and real data. (I’ve asked a company to sponsor this by giving us free licenses to their tools, but we’ll see if that comes through. There are plenty of open-source resources that will work.)

Who it’s for: Anyone 12 and up – young people and adults welcome. No prior knowledge needed. Participants will get maximum mileage if they have a brokerage account, but it’s not required.

Cost: Free. I’m doing this for Zak anyway.

Location: [redacted]

Schedule: TBD

Note: I will record sessions to share with remote friends who are interested by uploading as unlisted (undiscoverable but public) YouTube videos. Participation is implied consent to this.

Action items

1. If you’re interested or have questions, just reply. I’ll follow up once I have a sense of the group.
2. As a first step towards “doing” we need everyone to get to some absolute basics. I’m having Zak read Blue Chip Kids. but if you want a video series, I curated a custom sequence: Khan Videos in place of Blue Chip Kids for investing basics

This is a very loose draft of the plan. I will prepare a lesson before each session (this week is the first) and update this document. As always, work-in-progress.

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From My Actual Life

I’ve mentioned before that I coach both my boys CYO basketball teams (4th and 7th grade). The highlight of my past week was Zak’s (7th grade) game so I just want to share it.

Zak had a cold and a headache but we gave him some Advil and said to come root his team on. We were only going to have 5 players without him. He wore his uniform anyway in case he felt good enough to go and in pre-game shooting he said he could play.

The game was neck and neck. One of our players scored an unlikely basket off an offeensive rebound as the clock expired to send the game to overtime. It was shocking, everything about the rebound itself and making the layup from directly under the rim was unlikely.

We’re in OT, down by 2 with 5 seconds left. We intentionally foul. Our opponent misses both free throws. I was prepared to call timeout but Zak ripped the rebound and took off.

No point in calling the timeout since it wouldn’t advance the ball from our backcourt. Instinctually I liked our admittedly very slim chance better with him one on one against a chaser.

Well, he makes it to the 3-pt line, the chaser jumps pass him as he hesiatated for moment, and just put the shot up as the clock is expiring.

Swish.

We win by 1. The team mobs him. Because it’s an overtime game and these things are on tight schedules all the people there for the following game are watching and the whole place jumps.

It’s a meaningless 7th grade CYO game but it was a unique moment. We joked that it was his Jordan flu game.

Anyway, that win happened to clinch 1st place in our division but we had already clinched a playoff spot so it wasn’t integral. We wrap the regular season today and have playoffs in 2 weeks.

(I’ve already went to watch the team will most likely draw from the other division. They have a kid that’s 5’9 and one that’s 6’0. Zak is 5’4 and one of our bigger kids 🫣)

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• sticky vs floating strike
• slashing away parts of their humanity

Friends,

The following statements are simultaneously true:

1) You can do anything if you put your mind to it” is a lie.

If your last name is McCaffery, you have a chance of engineering elite athletes. If you are an Abdelmessih, you’ll be waiting for the metaverse for the sensation of what a 4.3 40 feels like.

2) You are currently very far from your ceiling.

You can drive a truck through the gap between these 2 ideas so they are not really in conflict.

To let the first disappoint you is to let perfection thwart the good. The cost of this pedantically true statement is self-defeat. It’s the kind of victory only an intellectual would recognize because it’s familiar territory — an unnatural use of technicalities to excuse failure because they define success as adherence to fine print. It’s a strange inversion of “It’s better to be roughly right than precisely wrong”. They are precisely right but roughly wrong, but the wrongness touches their life ceaselessly and in the most material ways.

To let the second statement disappoint you is known as a “start”. Congratulations. Recognition is the first step. This should be obvious, but the path to improvement starts by realizing there’s room for it. In you. Not in the world changing such that your conditions are improved, but for you to improve your station, with a smiling indifference to a world you can’t control anyway.

But I stay “start” because beginnings are sensitive to expectations. If you start anything expecting it to be easy, you will likely not finish. It’s such a simple observation, but it bears a life-changing load. It means that anything you are serious about doing should start with the expectation that it will test your resolve, so when the moment comes, you are not hit with the double indignity of difficulty but also surprise.

And one of those negative surprises always comes from others. Haters. But haters also come from people who don’t actually hate you. They may even love you. But this is how they deal with being disappointed in themselves.

This is not an easy subject. It’s at the root of how everyone relates to everyone else. It’s wrapped up in status, luck, a sense of narrow justice when it has to do with the promotion at work, and global justice in the sense of being born on third (or America…although whether the runner is heading home or to second is today’s “dress” debate).

It’s not as easy as saying “ignore everyone else”. There’s a scammer in jail or even just a common internet grifter who dismissed sober advice from someone they respect who they dismissed as speaking behind a veil of risk-aversion. Or less scandalous scenarios like “I’m dropping out of school to pursue acting”.

It’s a good idea to consider the judgement of those you are certain love you. But even then you need to grade them on a curve based on their own risk bias which takes some judgement of your own. Parents want to see their adult children on solid ground. If you win an Oscar and they get to walk the red carpet, that’s just gravy. That will never be in their calculus. But it might be in yours. They’re running a max-min strategy, you want to win the tournament.

(Rob Carver’s analogy to the Wordle starting word choice is a tangible expression of this for most of the English-speaking world who got swept up in that game.)

So if you should consider the judgment of loved ones and even then with skepticism, you know who you should definitely ignore? Randos and water-cooler friends. There’s just too much at stake.

I posted this on X in a thread where Ryan was parrying haters.

When it comes to haters its useful to remember that the correct retaliation is nothing but apathy which if the detractor was smart in the first place, they would realize that themselves. What’s that line about hate being like drinking poison and expecting the other person to die?

Hate seems like ultimate confession of weakness.

It’s very rare that anyone changes anyone else’s mind. Unlearning hurts.

The internet fools us because when life’s most important moments happen, your world shrinks. The volume on everything turns down, and you are left with a few people. The hater? Might as well be an atom in another galaxy. Why would they occur to you?

Attention is everything. Lots of people on here give you the gift of permitting yourself to ignore them. Accept it gratefully

Scott Adams, the Dilbert cartoonist, died this week after a battle with prostate cancer. He’s a politicized figure (Scott Alexander’s memorial post is a bizarre mix of tribute and psychoanalysis). But like many others, I’ve read his work on career advice and even the thought experiment book “God’s Debris” which I remember precisely nothing about. But I did see a quote from it this week, which I strongly agree with:

“People think they follow advice but they don’t. Humans are only capable of receiving information. They create their own advice. If you seek to influence someone, don’t waste time giving advice. You can change only what people know, not what they do.”

Money Angle

I want to expand briefly on Wednesday’s HOOD: A Case Study in “Renting the Straddle” because HOOD’s implied volatility that contains earnings actually declined for the rest of the week and disentangling that is a good chance to reinforce your understanding.

On Wednesday, Feb 13th HOOD vol (which encompasses earnings on Feb 10) lifted a bit from when I wrote the post. We’ll call it 68% IV.

To make 68% IV fit smoothly with the non-earnings vols from the preceding expirations, we need to assume an earnings move that allow the ex-earnings vol to be ~56%

That corresponds to about a 9.5% earnings move (a bit higher than the average move of 8.55% for the past 8 quarters).

This table shows implied trading day IVs net of various-sized expected earnings moves.

Let’s tie this idea back to theta or option time decay.

A one-day move of 9.5% corresponds to a single-day implied vol of ~119%

9.5% / .80 = 119%

This comes from remembering that an ATM straddle is 80% of the implied vol

As you approach the earnings day, the implied vol of the option will be dominated by the fact that the stock is expected to move 9.5%. Therefore, we know the implied vol is going to increase.

We think of theta as “how much value the option loses as time passes” but because we know that vol is going to steadily rise, we can conclude that the actual experience of theta is going to be much less than the model says. The model doesn’t “know” the implied vol is going to increase, but you do.

As vol increases, the option will gain value that offsets some of the theta. It won’t offset all the theta. If it did, then you would just buy all the options today, have free gamma for a month, and sell them right before earnings.

So much of the theta will be offset?

We can answer this if we hold our assumptions constant:

• trading day IV is 56%
• earnings move is 9.5%

(I added the assumption that the earnings date is also the expiration date. It’s stark that all the theta we defer happens on the last day.

You can see how the vega offsets part of the theta.

Just like with any option, the theta still accelerates as you approach expiry but at a slow rate (theta is left axis).

All the theta happens at the end.

Oh, as a matter of pragmatism, I should add that HOOD option markets are wide. And yet there’s millions of contracts of open interest! Amazing for market makers. To quote Alanis…isn’t that ironic?

Money Angle For Masochists

In Thursday’s paid subs post, embedding spot-vol correlation in option deltas, I buried this story but I thought worth sharing since it’s broadly suggestive of what happens when you list options on an investments touted as worth being in your asset allocation:

I started in commodity options just before the listing of electronic options markets. When I first stepped into the trading ring, many market-makers were still using paper sheets. We had spreadsheets on a tablet computer, but heard of a fledgling software called Whentech. Its founder, Dave Wender, was an options trader who saw the opportunity. I demo’d the product, and despite it being a glorified spreadsheet, it centralized a lot of busy work. It had an extensive library of option models and it was integrated with the exchange’s security master so its “sheets” were customized to the asset you wanted to trade.

I started using it right away. Since it was a small company, I was able to have lots of access to Dave with whom I’ve remained friends. I even helped with some of their calculations (weighted gamma was my most important contribution). I was a customer up until I left full-time trading. [Dave sold the company to the ICE in the early 2010s. It’s been called ICE Option Analytics or IOA for over a decade.]

The product evolved closely with the markets themselves. Its nomenclature even became the lingua franca of the floor. Everyone would refer to the daily implied move as a “breakeven” or the amount you needed the futures to move to breakeven on your gamma (most market-makers were long gamma). Breakeven was a field in the option model. Ari Pine’s twitter name is a callback to those days. Commodity traders didn’t even speak in terms of vols. They spoke of breakevens expanding and contracting.

What does this history have to do with a spot-vol correlation parameter?

This period of time, mid-aughts, was special in the oil markets. It was the decade of China’s hypergrowth. The commodity super-cycle. Exxon becoming the largest company in the world. (Today, energy’s share of the SPY is a tiny fraction of what it was 20 years ago.)

Oil options were booming along with open interest in “paper barrels” as Goldman carried on about commodities as an asset class. But what comes with financialization and passive investing?

Option selling. Especially calls.

Absent any political turmoil, resting call offers piled on the order books, vol coming in on every uptick as the futures climbed higher throughout the decade.

A little option theory goes a long way. Holding time and vol constant, what determines the price of an ATM straddle?

The underlying price itself: S

straddle = .8 * S *σ√T

If the market rallies 1%, you expect the straddle price at the new ATM strike to be 1% higher than the ATM straddle when the futures were lower. Since the “breakeven” is just the straddle / 16, you expect the breakeven to also expand by 1%.

But that’s not what was happening.

The breakevens would stay roughly the same as the market moved up and down.

If the breakevens stay the same, that means if the futures go up 1%, then the vol must be falling by 1% (ie 30 vol falling to 29.7 vol)

It dawned us. Our deltas are wrong.

If we are long vol, we need to be net long delta to actually be flat.

When your risk manager says why are you long delta and you explain “I need to lean long” to actually be flat, you can imagine the next question:

“Ok then, how many futures do you need to be extra long for this fudge factor?”

We need to bake this directly into the model because it’s getting hard to keep track of. Every asset and even every expiry within each asset seems to have different sensitivities between vol and spot. The risk report can’t be covered in asterisks detailing thumb-in-the-air trader leans.

Whentech listened. Whentech introduced a new skew model that allowed traders to specify a slope parameter that dictated the path of ATM IV. Their approach was simple and numerical…

 

From My Actual Life

I definitely have more couch potato tendencies in the winter. I’m currently watching Mad Men (for the first time!) I’m almost finished with Season 2 which means I like it.

I recommend the movie Eden on Netflix. Go into it knowing nothing. That’s how I went in (Yinh said let’s watch some movie called Eden and I said ok knowing nothing else). I’m so out of touch sometimes, we were a quarter of the way through the movie before I said “Isn’t that Jude Law?”

It’s definitiely one of those movies where right after you finish it, you’re googling “how true were the events in [movie title]?”

Wednesday night was the first time I ever went to a Cal game which is kinda pathetic since I’ve lived less than 20 minutes from Berkeley for over a decade now. But St. Mary’s College usually has a better hoops team, is even closer, and has a much smaller arena. It’s more of a gym than a venue.

Cal was able to hang with the Blue Devils for the first half before Duke started being Duke.

So many nepo babies in the game. Marbury’s son was is a sophomore walk-on for Cal (he’s only played 5 minutes all season though), Justin Pippen is Cal’s starting PG as a sophomore, and the freshman Boozer twins play for Duke (although only the 6’9” one sees the court. 6’4” bro MIA). The taller Boozer is a force. Much savvier than you might expect from a freshman big.

Duke brought out some local celebs. We didn’t see them, but Steph and Del Curry were there with family. We did see these guys one of whom’s life is basically a victory lap. Getting dapped up every 3 seconds, everyone taking selfies with him. You can decide who I’m talking about:

 

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• Illusions, Empathy, and the Hackability of Perception
• HOOD: A Case Study in “Renting the Straddle”
• embedding spot-vol correlation in option deltas

   

Friends,

I started to feel it over the break, but the feeling is inescapable after the past week.

This has nothing to do with current events. It’s me having the same reaction to Claude Code that early adopters using the terminal have already felt:

Work is going to feel very different by next Christmas. Yinh and I were talking about how long 2024 felt. There were a lot of life events, but just in terms of workflow, it felt like a year ago I was mostly using LLMs for transcription, editing, and giving it photos of broken stuff for help.

Today, I can write a description of a bug in Linear or Jira (who am I kidding — I upload a screenshot with a blurb and have AI write a detailed bug spec complete with testing protocol) and assign it to…”Claude bot”. A dev approves the change. Push to prod. Hundreds of hours saved over the course of a year. It’s accelerating by the week.

I’ll share more about what I’m doing personally in the letter this week, but here are a few must-reads if you are curious about getting more out of AI.

1) Claude, Code, and What Comes Next (6 min read) by Ethan Mollick

This is a strong overview of why Claude Code feels so stepped-up in capability. I’m using Opus 4.5 regularly and for one project in particular, its ability to compress the chat is lengthening the context window. This post is a nice primer to read while the idea of agents working 24/7 for you floats in the back of your mind.

2) How I code with agents, without being ‘technical’ by Ben Tossell

Khe texted me this post and it’s the next thing to read after Mollick’s. This gives you a glimpse into the near future (which is already here for Ben despite his humility in this post) with very concrete ideas. PSA: Khe’s letter is mandatory if you are a regular person trying to get the most out of the tools around us. I feel like I’m literally stepping in his tracks, just 3 months behind as I’m finally using Claude Code (I just needed it to be in a desktop app rather than command line because I just think DOS and my brain powers off.)

In this article, Ben says:

Not to be like everyone else on Twitter when they see Andrej Karpathy tweeting something, but this really rang true to me: **there’s a new programmable layer of abstraction to master.**

First of all, I have the Claude extension in my chrome browser. This lets you talk to Claude about anything you are seeing. Like the design of the website you’re on? Ask it to extract a style sheet. Don’t want to read the whole email or article? No need to copy/paste, just ask the sidekick to summarize it. There’s even a Google Sheets add-on if you want it to spreadsheet for you.

In this case, I just asked Claude in my browser for the Karpathy thread that Ben is referencing.

Boom, it just goes out to the web and finds it.

Here’s the Karpathy quote:

I’ve never felt this much behind as a programmer. The profession is being dramatically refactored as the bits contributed by the programmer are increasingly sparse and between. I have a sense that I could be 10X more powerful if I just properly string together what has become available over the last ~year and a failure to claim the boost feels decidedly like skill issue. There’s a new programmable layer of abstraction to master (in addition to the usual layers below) involving agents, subagents, their prompts, contexts, memory, modes, permissions, tools, plugins, skills, hooks, MCP, LSP, slash commands, workflows, IDE integrations, and a need to build an all-encompassing mental model for strengths and pitfalls of fundamentally stochastic, fallible, unintelligible and changing entities suddenly intermingled with what used to be good old fashioned engineering. Clearly some powerful alien tool was handed around except it comes with no manual and everyone has to figure out how to hold it and operate it, while the resulting magnitude 9 earthquake is rocking the profession. Roll up your sleeves to not fall behind.

If Karpathy feels behind, I guess the rest of us shouldn’t feel so bad. But the part I bolded feels big. Like you need to stop your first reflex about how you’d approach a problem and embody someone to whom this is all native to (while recognizing that nobody is perfectly native to it. Instead, there’s a continuum of how far along people are in how easily they consider problems in light of the new capabilities.)

3) Claude Codes by Zvi Mowshowitz

Things are moving fast. This came out 48 hours ago. Highly practical and honest assessment of the current state. Also happens to echo my opinion — this is going to be a vertical year in terms of workflow.

4) Greg Isenberg on “what young builders do” (X thread)

This thread is just a mind-eff because it shows the frontier of the kids building in the context of entrepreneurship.

5) Everyone Is Wrong About the Skilled Labor Shortage (5 min read) by Jon Matzner

. I tend not to think about things along the lines of “what are the jobs of the future”. It feels like when you do that, you are choosing a self-alienating frame that favores the predicate over the subject.

Anyway, a local friend is a lecturer at Cal in AI. Kids similar age as mine. He gets asked about future jobs all the time and I can’t pretend I never think of that even if I resist the impulse.

His answer is “fix people, fix animals, or fix robots”. He’s also partial to the “trades”. Basically, work that AI will eat last.

It makes sense. I can’t say I’m sold. My own view is that the acceleration is so fast that any prediction on those lines is swamped by the error bars, but insofar as you must choose, it’s as good a guess any. But that’s not a great foundation for deciding, so I just treat that topic as entertainment.

My view here even disappoints me because it sounds helpless with respect to planning. But then I read an article like Matzner’s and it’s an example of how a lot of consensus thinking (like going into the trades) is perfectly risky. The frictions to knowing how to do something will melt. The asymmetry in info that a tradesperson has compared to the client has been narrowing over time (YouTube) but the “last mile” of actually doing is going to get shorter. You’re going to know how to fix anything at home, it will be a question of whether the time is worth it or not. If there are no jobs, we’ll have plenty of time to fix things. I think I’m kidding. But what if I’m accidentally right?

6) Dos Capital by Zvi Mowshowitz

And now we get to the macro. Provocation instead of practical. For the lolz.

Zvi’s post is a reaction to Trammell and Dwarkesh’s post about the unprecedented wealth inequality we are about to see. What Zvi calls absurd is effectively Trammel & Dwarkesh not taking their premise seriously enough.

Zvi (emphasis mine):

They affirm, as do I, that Piketty was centrally wrong about capital accumulation in the past, for many well understood reasons, many of which they lay out.

They then posit that Piketty could have been unintentionally describing our AI future.

As in, IF, as they say they expect is likely:

[redacted list of assumptions in order]

Does the above conclusion follow from the above premises if you include the implicit assumptions?

Then yes. Very, very obviously yes. This is basic math.

Sounds Like This Is Not Our Main Problem In This Scenario?

In this scenario, sufficiently capable AIs and robots are multiplying without limit and are perfect substitutes for human labor.

Perhaps ‘what about the distribution of wealth among humans’ is the wrong question?

I notice I have much more important questions about such worlds where the share of profits that goes to some combination AI, robots and capital rises to all of it.

Why should the implicit assumptions hold? Why should we presume humans retain primary or all ownership of capital over time? Why should we assume humans are able to retain control over this future and make meaningful decisions? Why should we assume the humans remain able to even physically survive let alone thrive?

Note especially the assumption that AIs don’t end up with substantial private property. The best returns on capital in such worlds would obviously go to ‘the AIs that are, directly or indirectly, instructed to do that.’…

Even if we assumed all of that, why should we assume that private property rights would be indefinitely respected at limitless scale, on the level of owning galaxies? Why should we even expect property rights to be long term respected under normal conditions, here on Earth? Especially in a post calling for aggressive taxation on wealth, which is kind of the central ‘nice’ case of not respecting private property.

The world described here has AIs that are no longer normal technology (while it tries to treat them as normal in other places anyway), it is not remotely at equilibrium, there is no reason to expect its property rights to endorse or to stay meaningful, it would be dominated by its AIs, and it would not long endure.

If humans really are no longer useful, that breaks most of the assumptions and models of traditional econ along with everyone else’s models, and people typically keep assuming actually humans will still be useful for something sufficiently for comparative advantage to rescue us, and can’t actually wrap their heads around it not being true and humans being true zero marginal product workers given costs.

That’s the thing. If we’re talking about a Dyson sphere world, why are we pretending any of these questions are remotely important or ultimately matter? At some point you have to stop playing with toys.

I don’t even know that ‘wealth’ and ‘consumption’ would be meaningful concepts that look similar to how they look now, among other even bigger questions. I don’t expect ‘the basics’ to hold and I think we have good reasons to expect many of them not to.

Ultimately all of this, as Tomas Bjartur puts it, imagines an absurd world, assuming away all of the dynamics that matter most. Which still leaves something fun and potentially insightful to argue about, I’m happy to do that, but don’t lose sight of it not being a plausible future world, and taking as a given that all our ‘real’ problems mysteriously turn out fine despite us having no way to even plausibly describe what that would look like, let alone any idea how to chart a path towards making it happen.

The AI discourse is a ready reminder that there are no rules. There’s only power. We are bears on a unicycle. To some of our tech overlords humanity is but an experiment. A branch of a codebase we can’t see the extent of. And most likely NOT ‘main’.

To be overwhelmingly confident that this path is humanist is either hubris or motivated by the next round of funding. It just doesn’t seem clear to me that human flourishing is a layup end state of this trajectory.

Google’s mission is “to organize the world’s information and make it universally accessible and useful.” Google’s AI division’s mantra?

“Solve intelligence, and then use that to solve everything else.”

There’s mission creep and then there’s MISSION CREEP. If a business’s goal is to solve a problem and this is a quest to solve all the problems, I think it’s only fair to ask, while we still can…

“What is the last problem?”

[Nate Bargatze voice: Nobody knows]

Not a bad place to insert Asimov’s famous short story, The Last Question.

Money Angle

These 3 videos had me dying. The dude behind them, Benjamin, clearly has a strong grasp of trading and investing, but this is totally underselling the talent.

Erik pointed him out to me. Benjamin publishes videos rarely (they take a long time to create), but despite being sparse in his output the quality is so good that you can see why they get millions of views and why the channel has over 600k subs. You don’t generally see these numbers on an account that has published 33 videos total.

Enjoy!

Money Angle For Masochists

From Kevin Mak’s outstanding Price Discovery and Trading:

What’s elegant is that this example very quickly teaches people to go from thinking with an individualistic perspective (what do I think it’s worth?) to thinking with a market perspective (what is the market saying it’s worth?). This shift in the way you think is extremely counterintuitive to non-market people (who are the majority of my students, and a majority of the population in general).

I urge you to read the post because it contains beautiful game that Kevin created to give students a visceral sense of how prices emerge from the interplay of public and private information.

Just after Christmas, I spent a day at the Arbor Quant Bootcamp run by Ricki & Ross. The bootcamp is 4 days. I attended “options” day (and even had the honor of speaking for an hour).

Options day is the last day of the camp. The capstone game brings together everything you learned over the course of 4 days. It was, by far, the coolest simulation I have ever seen of a trading situation. I won’t say too much but it involves teams huddled around computers live trading a situation that brings together options, index arb, game theory, probability, and an incredibly layered scenario where the right approach is not a settled matter. An incredible canvas for socratic teaching on top of a basic corpus of financial plumbing.

Given the audience of this letter, I hope you can all experience this one day. I sent my neighbor’s son to this bootcamp a few months before entering college because he wanted to know how he’d know if he liked trading. You will walk away from this bootcamp either unable to think of anything else other than what you just experienced or you will want to run far away. Either way you win because you’ll understand what trading really is (and why it’s a general skill set — which explains how many traders at prop firms have traded many different asset classes and markets).

It is a stark experience. You go on the internet and get some impression of what trading is and then you attend this lobotomy and can’t see markets the same way. For the uninitiated, it will spark the “Omg, I can see how looking at the world through this lens prints money for Jane Street et al”.

I have no financial interest in Arbor’s business, I’m just a huge fan. I’ll obviously boost the next session once it’s announced.

(Also, I’ve been working on a card game and one of the mechanics in their simulations might be the unlock I’m looking for. We’ll see. It’s an ongoing project in the moontower skunkworks.)

Advice

I had lots of conversations with people in attendance who were just starting their trading careers ,either at banks, private funds, or prop firms. I was asked for advice quite a bit. I’m generally uncomfortable with that because a lot of the best advice is banal (“don’t be late to work”) and more specific advice is so overfit that you can find its opposite in other people you admire.

But I did get asked one question that I had the rare fast, confident answer to. An eager fella asked me what asset class he should try to get into “for his career”.

Hold your horses, kid. You’re pivoting your data on the wrong column.

You should be more concerned about who you learn from. Asset classes go hot and cold, often for long stretches. They also teach you different things. Single stock option trading is very different from trading options on macro assets or index.

[I should probably write about this, but one is much closer to heads-up no-limit poker and the p/l glide paths from t-zero to t+x is totally inverted between the 2 businesses. If you want to have some laughs, put an index trader in a stock trader’s seat or vice versa. One can learn the other, but there’s an unlearning and learning curve.]

You may not have a choice in who you learn from. You will also not have a mature enough taste when you are starting out to distinguish mentors. So the beginning of your career is an especially sensitive starting condition to an already-wiggly path. But you’re better off at least being aware that “who” is more important than “what”. The right surroundings can turbo-charge your career or saddle you with habits you might never unlearn.

On advice, Gappy’s updated memo is terrific:

2025 Buy-Side Quant Job Advice

 

From My Actual Life

We played a lot of games over the holiday break. Some recs.

Timeline games

Hitster: Draw a card. Scan the QR code and a song plays on Spotify. Place it on your timeline based on the year the song was released. First player to line up 10 cards wins.

Chronology: Same idea as Hitster but cards with historical events written on them. Did you know the first looping roller coaster preceded the Gettysburg Address? Neither did I.

Weirdly, these games are not by the same company despite the same mechanic of completing a timeline of 10. I’ve never played a game with that mechanic and then played 2 with 4 days. Baader-Meinhof game moment, I guess.

 

Trickery games

Imposter: This is a free social deduction game that got a lot of play since we had several large gatherings.

 

Skull: I’ve boosted this game before. It’s reminiscent of poker or Liar’s Dice but we played a bunch over break with several groups and it universally loved. Even the 9 year-olds were super into it. Take 2 minutes to learn but then it’s very rich.

My favorite game review channel is Shut Up & Sit Down:

You really don’t need to buy the game to play it. Here’s the same game played with whatever cards you have around the house:

Finally, we played a giant round of a game I wrote about last year:

Left Center Right (1 min video)

This game is pure degeneracy and takes less than a minute to learn. Asian grandmas and 5-year-olds alike will lose their minds over it. Huge party hit this holidays. It’s actually an old game, but new to me. It has zero skill so when I heard how it works I immediately poo poo’d it but playing it in a group of 15 for a little cash is amazing.

If you want to make it skillful just create an open outcry side-market on who the winner is. Let’s say “Ann” is playing…Ann futures settle to 0 or 100 depending on if Ann wins so you can bid, offer, or trade any integer price between 0 and 100 based on your assessed probability of Ann winning. It’s a faithful simulation of mock trading (and really similar to the StockSlam game I was playing a couple years ago).

This year, we played a single round of LCR on Christmas Day that took close to an hour. 17 people with a $20 buy-in. Winner got $340. Asian aunties were rabid. Call me whatever you want, but “these people” love gambling.

[Because of the buy-in, we used poker chips instead of singles for tokens. I was told this took away from the experience since “grandma wants to see the cash”. Noted for next time.]

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• slop
• Vol orders and discussion on option execution
• https://trading-sim.moontowermeta.com/

   

Friends,

A message for the 6th year in a row:

As always around the holidays, Moontower is taking the next few weeks off and returning in January. We can all use a bit less stimulation at the end of the year. Play boardgames, go to sleep late, binge some shows, gain a few pounds. Laugh so hard bourbon eggnog comes out your nose. Shower your loved ones with attention. You’re not missing anything, including Moontower.

🎙️98 Years of Economic Wisdom (People I (Mostly) Admire Podcast)

Gappy recommended this one. Steven Levitt (Freakonomics) interviewed the late Nobel Laureate, Robert Solow, months before he passed. There are great individual sections of the interview. Like Solow’s take on the modern state of academic economics. Or his service in WWII. My god, that whole section is amazing — Solow is such a mench. Which brings me to what I said to Gappy thanking him for the rec…

Listen to how Solow takes a question, appreciates its facets and breaks it down. Someone so wise whose able to rattle off enlightening answers at the same time conveying sincere humility at the limits of his knowledge. And he’s 98 when he does this interview! Then try listening to anyone in public leadership. Every single word that comes out of politicians’ mouths is self-interested propaganda. It’s exhausting for every public appeal to be to the lowest common denominator.

Meanwhile, I’m watching the Ken Burns documentary on the American Revolution and they just covered the part about how viral Thomas Paine’s pamphlet Common Sense went. It was deeply influential document at a critical time in the conflict. And it’s not an easy read!

Neil Postman’s Amusing Ourselves to Death covers this idea head-on. When we were at our most literate, we were capable of more nuanced thoughts. The discourse was on a much higher level hundreds of years ago. (That book is like 100 pages — that’s the best stocking stuffer out there. Stuff your own stocking with it.)

Anyway, listening to Solow was so delightful. It’s lucid. It’s kinda special in that it quiets the mind while activating it. But then it’s over, I turn on a screen, and my head’s in the dryer again.

Money Angle

🎙️Acquired’s Google: The AI Company

I just finished listening to this after taking it snippets while shuttling the kids around in the car during the past month. It’s 4 hours long. Khe Hy texted it to me with “this is the best podcast I’ve ever listened to”. My wife also recommended it. And then I was at my monthly dinner with guys I worked with for over 20 years and one of them told the rest of this episode pushed him over the edge — he made GOOG the biggest position in his investment portfolio. “10x bigger than the next position”.

I almost never trade single stocks myself and I bought GOOG during the Liberation Day melee. Although not nearly enough. I sold it for $100 a share profit…in other words 1/3 LOWER than where we are today. If I heard that episode earlier I never would have sold. (I’m about to buy it again fthough — for my son’s account).

Putting the stock aside, the podcast is an amazing history of AI and filled with so many stories that are both fascinating and flat-out unsettling, especially when you realize how small the room is “where it happens”. I feel very much like a pawn.

It’s also a glimpse into how much leverage there is in being really, really smart in the modern era. The difference between being 99.99% and 99.5% seems to be billions of dollars. It made think that while trading firms are not operating on the same scale as GOOG, the growth in profits at the smartest firms like Jane and HRT suggests breakthroughs in money glitches that I’d expect if GOOG bothered with a subsidiary to apply their intelligence to slumming over zero-sum alpha.

In any case, I could go on and on about specific parts of the episode, but just give it a listen. Fair warning — you will feel tiny afterwards.

Money Angle For Masochists

SIG’s Todd Simkin interview with Ethan came out before mine. I just watched it. These are always good.

I’ll just excerpt the section about prediction markets below. You are going to keep hearing about them. You are going to see them in your brokerage accounts. Godspeed.

On prediction markets as risk transfer

“The world is a richer place when people can freely transfer risk from those that are less able to stomach it to those that are more able to stomach it.”

“Every trade makes both parties better off because they have another option which is not to enter the trade.”

On why market size reflects real-world exposure

“Everything finds its appropriate level. There shouldn’t be billions of dollars exchanging hands on whether or not Taylor Swift holds the top 10 spots on Spotify. People don’t have a billion dollars worth of risk on her performance as an artist in a certain time period… There are real implications to businesses about things like tax rates or tariff rates. You can hedge this sometimes imperfectly, but you can hedge it by using prediction markets.”

On tailoring contracts to real business risk

“What I really like about the prediction markets is that the contracts can be tailored to the specific risk that you’re looking to transfer.

If you can dial in exactly the risk that you want and have a market listed on it…If the true probability is 20% and they charge 21%, you’re probably happy to pay it because you don’t want the one-in-five chance of it going to 100%.

If they said they’re going to charge you 50% for it then you don’t trade it.

On liquidity as information

“Not enough liquidity comes in, which is also information. That’s information you can use to figure out whether this is the right time to be talking to somebody in Mexico about a different source of product.”

2025 Money Masochist Writing

In case you haven’t noticed the pattern…Thursday’s posts, the only ones I paywall, are almost all about trading, options, or quant topics

[although I’m not a quant so it’s more like you get a (hopefully) tasteful quant-curious perspective from someone who’s squeezed a lot of mileage out of grade-school arithmetic].

I’m better at predicting how popular a Thursday post will be than a regular post.

[Long meta aside:

This is probably because I have a decent map of how well people understand and don’t understand some of those topics based on questions I receive, but also because experience grasps subtle concepts that elude the amateur’s eye. There are some things you’d never look for until you lost money on them. You update your mind’s custom instructions to consider them in the future. This is an intrinsically advantageous place to be able to write from because it’s easy to reach into your bag to pull out a surprise-resolution trick.

This letter is popular in the trading world not because I’ve had rare experiences. In fact, it’s just the opposite. The inbound I get is that I’ve put words to exactly what traders have noticed. The success of this letter is not in what I know. It’s in the willingness to write them down.

Since the typical trader is an EV maximizer, writing does not screen as something worth doing. They are correct. I doubt I’ve earned a babysitter’s wage if you consider that I’m well past halfway to my 10,000 hours in this no-longer-new writing endeavor.]

Again, pretty good at predicting which masochist posts will be popular. But occasionally I’m wrong. And there’s one particular form of wrong I find unsettling. When I learn a lot from writing a post which means even I get to experience some surprise, but then that doesn’t carry over to the reader. I write something I find very pleasing because I got to upgrade my thinking, I put it into the world, and I’m left to interpret the readers’ indifference as “duh, we already knew that”. I’m like the last kid in this video meme…

The post that had the largest gap between what I find fascinating and what readers found resonant was a recent one:

The Coastline Paradox in Financial Markets

So I removed the paywall. Maybe I’m miscalibrated on how neat I thought that one was or because my math skills are less than the readership* so it was naturally more enlightening to me.

Anyway, have at it.

*The survey results point to the royal YOU being more educated than I. The survey also was interesting regarding the next section. It’s a primary draw for a set of readers but also the most likely to be skipped (along with the Masochists) section. Feels like an opportunity for some “bundling economics” expert to optimize my revenue, but even saying that feels exhausting in that way that only modernity can make you feel.

For the folks who want to follow more of the actual life stuff you can follow my Insta. I lately have been reposting from my wife’s stories (her IG stories are popular with a wide group of friends and associates — her finance job requires a lot of “peopling” — which is funny because I’m more of the extrovert but definitely less skilled and all the distinctions within that are things I wouldn’t even be aware of if it wasn’t for her). My favorite social media is her stories because it’s often a different perspective or focus of attention on the experiences we share (I don’t think about the Roman Empire, but that meme still hits hard). But also because IG stories is one of her art forms — she’s like good at all the animations, music, and stuff.

If you wanna follow:

my insta

her insta

Just fyi…there’s almost no regular posts, it’s all IG Stories.

One more useful life-hack. The Meta algorithms can be weaponized to your advantage. With the move we have been buying furniture, redecorating, etc. We have bought lots of stuff from Facebook Marketplace. Designer furnishings (and music equipment), like nice cars, depreciate as soon as you buy them but also stop decaying at transparent levels when you look at the used market. So if you buy them used you are basically renting them for free or just getting a good deal.

Anyway, the IG and FB marketplaces are amazing at putting the things you actually would be interested in buying in front of your face. IG has become a primary search engine for things like “desk”. For better or worse, META products have little to do with connecting with people in my life and far more to do with outright consumerism but it is solving a pain point and surfacing some niche brands. I should compile a list of these. Something for the new year maybe.

From My Actual Life

I look forward to some downtime. On the professional front, 2025 had good growth at moontower.ai, a lot of writing right here in the Substack, interesting consulting and teaching opportunities, an increasing amount of feedback that this project has turned into “the most read letter at trading firms”, a small but growing YouTube channel, and so much more proficiency in the AI-code loop (although still scratching the surface at the same time!). Of course, all the time I spent in generation mode had a cost. I only read 2 books. An adult low. I even listened to much less music and podcasts, according to Spotify Wrapped minutes. On the investing front, avoided landmines, had a nice score in silver (thanks to Alexander Campbell I bought silver futures at the start of the year) and got a nice exit on my private shares in Ezra (acquired by Function). I’m underweight risky assets in general, so these pointy scores really just helped me get a market-like return. I don’t explicitly think in “barbell” terms but I guess this is how this year turned out.

On to a few activities that occupied my non-working, and clearly non-exciting (not a complaint — I’m no adrenaline junkie) life:

• Continuing to play bass with my band at the music school
• Coaching both my boys’ basketball teams
• Getting on to a functional health program this summer. Been meaning to write or possibly do a webinar about this. I do the preventative MRIs (not just an Ezra investor but a client), but now keeping better tabs on bloodwork and disentangling myself from what feels like an increasingly stodgy PCP system. “Your booking physcials 4 months out?” Pass. I’m a 47-year-old hypochondriac. I don’t have patience for that.
• Visiting Austin a couple times and even having the little guy shadow at Alpha School.
• 25-year Cornell Reunion weekend. Ithaca in the summer is undefeated.
• Participation and contribution at the social club we started in town that is 3 years old now

But the most memorable occasions, both good and bad, were major family events.

My father passed away on May 19th, ending 2 years of profound suffering. The weight I was carrying did not show how heavy it was until I found peace on the other side. Dreams of giving his eulogy would intrude on my daily life at strange times. I believe it was a pull to confront a lot of conflict I carried within me. The mind and body are intricate machines. I was being “prepared”. I am grateful for the love, light, and learning he is within me. I didn’t always see it that way. But all of the feelings serve me in ways that (I hope) make me better.

About a week after the funeral, on a Tuesday, just before we left for SFO to go to NY for my Cornell Reunion we swung by an open house that was around the corner from our rental. We needed to get to the plane, so we had to sprint through it. A month later we closed on that home. And it feels like home. We love it. The boys have their own room, the formal living room is a soundproofed rock & roll room because we ain’t formal, and we are building Yinh’s mom a beautiful ADU (architect’s rendering):

Finally, 2 of my cousins’ had weddings that brought the extended family together multiple times this year, including a giant reunion in Sicily this summer. When Egyptians and Italians have a reception:

I share the good things because I need to. Inside my brain there’s nothing but flaws. I just see the gaps between where I want things to be and where I am. To be a bit harsh, I think any good work requires this, but the side effect is unhealthy anxieties. I don’t know if it can be any other way.

But life is fragile. The volume on everything I pay attention to now can be turned way down if life transmits a “We interrupt this broadcast because…” message. That’s clearer as you age (if you’re lucky by the way — this is a brutal lesson to learn when you are young). So when it’s your time, people will remember the moments together.

If you are fortunate enough to be with loved ones this holiday season, savor it. Invite magic by delighting someone. Be present. Scrap the politics and bond over personal stories, not some grand worldview philosophizing. Retreat into your cozy couch chats at 1 am with cocoa or wine, play Taboo or Codenames, and for heaven’s sake, strum some chords fam.

I’ll be back in January. I gotta go beg my son to wrap some gifts for me now. My handiwork looks like a wolverine got into the tape.

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• the poor and the magnificent
• Pricing 0DTEs
• Moontower Survey Results

   

Friends,

First of all, here’s the slides I shared in this vid:

I hope that video was helpful. I watched it again because I think the topic is complicated, not technically, but because it’s counterintuitive. Trades like that were bread-and-butter through my pro career (and very much why I “spotted” it despite it not sticking out in the tools other than the Trade Ideas filter which is highly validating of our algorithm! I’ll allow myself to be happy about my own work for 1 second. Ok moment’s passed, let’s continue.)

Before we head on to Money Angle stuff I’ll share 2 things I enjoyed.

Fermat’s Last Theorem Documentary (link)

This 45-minute video follows the story of Andrew Wiles’ quest to prove Fermat’s Last Theorem. I didn’t know the history of the theorem or even what it stated. It claims that for any whole number exponent other than 2 there are no values of A,B,C that would satisfy Aˣ + Bˣ = Cˣ. You can’t prove this computationally because there’s an infinite number of possibilities. The proof requires mathematical logic.

Fermat allegedly had a proof but hadn’t written it down. Turns out Wiles’ proof would have been impossible for Fermat to have known (this will make sense when you watch it). Anyway, I loved it. Yinh fell asleep. YMMV.

Holiday coziness — games!

I taught both my boys backgammon this past week. This is the younger guy playing with mom.

I used to play a lot with my colleagues during the year I was a broker on the NYSE floor. Every time I came back to the “booth” (that’s the area with the phones on the sides of the exchange floor where clerks take orders from customers), I’d make a move on the Jellyfish software. When I was at Parallax, I worked with 2 of the best backgammon players in the world (one of them was the best in the world iirc) and Parallax was actually founded by Roger Low, who was a world-class player himself. Roger had retired by the time I joined so I never got to know him.

Backgammon is especially neat if you like options because the doubling cube begs you to price volatility.

💡Fun fact

When I had my phone interview with SIG (this is the round that happens in between campus interview and the final on-site) I was asked a basic question regarding the cube. Since accepting the cube doubles the stakes of the game and rejecting it forfeits the current value of the game, what is the minimum probability of winning you need to accept it?

When looking at the board you need to evaluate how risky the position is. Like how likely is the tide to turn? When you offer the cube you are selling your opponent an option and its value depends on their chance to come back. But if you offer it to them when they have no chance they will reject it and be bailed out because you have now sacrificed your own possibility of getting a gammon (double points) or backgammon (triple points) if you beat them by a large margin.

It’s a great game for kids because they get to practice dice math. I was playing last night and knew I’d win as long as my next roll wasn’t a [1,1], [1,2], [2,1], [3,3]. So the kids would first need to figure out that’s what they are rooting for and then I ask them the probability. 4 out of 36 or 1/9. Plus the little guy figured out that the 7 is the most common roll and how to count the number of ways to get each number (he was delighted by the pyramid pattern when he realized it).

We always play more games during the cozy holiday season and I’m irrationally pleased that this season it’s backgammon. I recommend it.

[Also, if you are just learning, play a bot on your phone. You learn the game very quickly getting trounced by bots. Ultimately, I’m just a casual player, I never studied it, but would just play for $5 a game with my NYSE squad. Of course, with the doubling cube and possibility of gammons that can multiply pretty quickly. The real hitters play for four and five figures per game.]

Money Angle

On Nov 26th, Imran asked his followers would what more likely to double in the next year — gold or BTC?

I looked at the result of the poll just a few hours after it was posted and it was BTC 52% to gold 48%.

By the time the poll closed with 750 votes, BTC had garnered 2/3 of the votes.

I don’t know if me a jerk had anything to do with this but when I saw that the vote was almost a coin flip I chimed in.

Focus on the last part.

The poll should be nowhere near 50/50 because you would be able to lock in a great trade by selling gold in this proposition, buying gold call spreads financed by even more expensive BTC call spreads.

This is a classic difference between markets and democracy. It’s a perfect example of the Dinosaur Markets post in real life. The markets in the options reflect the volatility and the cost of replicating these bets. Money-weighted votes are interested in the truth where opinions are cheap as sand.

It’s very difficult to have opinions that are above replacement value about liquid assets. If you’re truly good at this, then being Scrooge McDuck rich based on consistently betting on these fantastic opinions is the only proof of such a skill. Few people are rich because of a crystal ball.

A good way to make a living in finance is to find the people that voted for gold in this poll and offer to trade with them. You need to do this in the dark because if you tried to do it on a public exchange, you’d be undercut by traders competing to sell the gold proposition to these opinionated people and it would drive the price down to a non-arbitrageable price.

Public markets protect overconfident people with arbitrageable opinions from their own ignorance and stupidity. Private or non-transparent markets are nice ways to shove a vacuum hose into their bank account.

There are many places where there’s alpha in projecting your opinion. This is the stuff you spend your time on in life. Where you have self-knowledge, private info, competitive advantage, skills, taste and so on.

But when it comes to markets, remember what we learned here just a few weeks ago:

the arbitrage reflex is more profitable than the opinion reflex

 

Money Angle For Masochists

Let’s continue on the same theme because these threads are going to become far more frequent for anyone who cares about markets. “Thinking in Bets” has a long runway, the way this country is headed, before it jumps the shark, so you might as well get used to it. From “Everything computer?” to “everything casino?”

Prediction Market Arbitrage: Using Option Chains to Find Mispriced Bets

Horse tweeted:

The moment you see a bet on a platform like Kalshi, Polymarket, or the soon-to-be Robinhood+SIG exchange, your mind should jump to the options chain.

The tweet says the Kalshi market is pricing a 9% chance of BTC hitting $250k

The options market can offer a quick sanity check. BTC is about a 55% vol. We are just being very approximate so not worrying about the term structure. I just want to show you my automatic mental response to the tweet.

Without hesitating, I pulled up the calculator on my phone and entered:

ln(250k/89k) / (.55 * sqrt(13/12))

Why?

We want to compute how many standard deviations away the $250k strike is to get a z-score which we can then convert to probability. Standard deviation depends on volatility and time. The more time or volatility you have the “closer” some percent return is. A strike that’s 100% away is extremely “far” if the asset needs to get there by tomorrow. If you have 10 years to get there, it’s not super far at all, you only need to go up 7% per year. Likewise, if an asset only varies by 5% a year, 100% is “far”, but if it moves 50% per year, 100% feels much “closer” or possible.

The formula above is simply dividing the percent return to get to the strike by the annualized volatility scaled by root(time) to find the distance.*

*Standard deviation or volatility as a quantity is proportional to the square root of time. Or you can say variance, the square of standard deviation, is proportional to time. The easiest way to remember this is to recall that when you compute the standard deviation of anything, you have an intermediate step of summing the squared deviations to get the variance, then divide by N. But to get back to the standard deviation, you take the square root of the ratio. The ratio in the intermediate step was variance/N. The final answer, the standard deviation, was the ratio of sqrt(variance) / sqrt( N). In our computations, N is replaced by time.

At the time of the tweet, BTC was 89k and there was 13 months until 2027. I assume 55% volatility.

Solving:

ln(250k/89k) / (.55 * sqrt(13/12)) = 1.80 standard deviations

We then use a standard normal table or normdist in Excel to see that 1.80 standard deviations encompasses about 96.4% of the cumulative distribution. Therefore, the probability of BTC going HIGHER than 1.8o standard deviations must be 3.6%

This is fully explained in Using Log Returns And Volatility To Normalize Strike Distances

The computation of this distance, besides being dependent on an estimate of volatility which we can borrow from the options market, assumes the asset is lognormally distributed. If you believe, as the options market certainly will if you look not at the at-the-money vol, but the far out-of-the-money call vols, that there is more positive skew than a lognormal distribution then our 3.6% estimate is too low.

But that logic is moving us in the right direction. We want to take the intel embedded in the options market when considering the price in the prediction market. We expect the liquid options market with much more volume and money behind it, to be the best guess as to the “fair price” of a proposition. If there’s an edge, it will be in the mispriced prediction market.

A prediction market bet can take a binary flavor. For example, “Probability that BTC settles above X by some date.”

It can take a “one touch” flavor. “BTC to touch but not necessarily settle above X by some date.”

Of course, “touch” is more likely than “settle” because “touch” encompasses all the times BTC settles above X, but also includes all the cases where it breaches X and falls back below X by expiry.

We can get information about the price of both binary and one-touch scenarios from the option market.

1. The Binary Bet: Price the Terminal Outcome with Vertical Spreads

Pricing: To find the true market-implied probability of the event, use the price of the spread:

Vertical spread price/Distance between the strikes ~ probability of asset expiring above he midpoint of the spread

Potential arbitrage if…the probability implied by the options chain is lower than the price offered on the prediction platform, you can buy the vertical spread and take the under in the prediction market or vice versa.

Further Reading: A Deeper Understanding of Vertical Spreads

2. The Path Bet: Account for Skew and Volatility with the One-Touch Rule

Pricing: You can estimate the path probability using the trader’s rule of thumb: take the delta of the vanilla option at that strike and multiply it by 2. This naturally takes into account the option implied skew because the delta is derived from the implied volatility at the strike.

The mechanics of an arbitrage here are complicated as it requires dynamic hedging. If that sounds interesting, perhaps you are born to be an exotic options trader. I have never tried replicating a one-touch option so while I could certainly “financially hack” a model, the main point I want to convey is that the pricing of the one-touch can be inferred from the vanilla options market.

Further Reading: one-touch

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• myelination
• “day in the life” zoom meetup
• A fat, unintuitive calendar spread

Friends,

I really hope to be helpful today so bear with me as this isn’t the rosiest way to begin.

This tweet halted my scroll:

For whatever reason, AOL (what year is this?) has an unpaywalled copy of the article:

A Recipe For Idiocracy

It’s short, but let me pull an excerpt anyway:

For the past several years, America has been using its young people as lab rats in a sweeping, if not exactly thought-out, education experiment. Schools across the country have been lowering standards and removing penalties for failure. The results are coming into focus.

Five years ago, about 30 incoming freshmen at UC San Diego arrived with math skills below high-school level. Now, according to a recent report from UC San Diego faculty and administrators, that number is more than 900—and most of those students don’t fully meet middle-school math standards. Many students struggle with fractions and simple algebra problems. Last year, the university, which admits fewer than 30 percent of undergraduate applicants, launched a remedial-math course that focuses entirely on concepts taught in elementary and middle school. (According to the report, more than 60 percent of students who took the previous version of the course couldn’t divide a fraction by two.) One of the course’s tutors noted that students faced more issues with “logical thinking” than with math facts per se. They didn’t know how to begin solving word problems.

The university’s problems are extreme, but they are not unique.

The article drones on. None of it uplifting.

“We call it quantitative literacy, just knowing which fraction is larger or smaller, that the slope is positive when it is going up,” Janine Wilson, the chair of the undergraduate economics program at UC Davis, told me. “Things like that are just kind of in our bones when we are college ready. We are just seeing many folks without that capability.”

Here’s Jared’s firsthand experience as a teacher while quoting that article:

This should remind you of this quiz from 2 weeks ago…

Victor Haghani referring to the quiz (emphasis mine):

It is well-known (and disturbing) that the financial literacy of this audience is, on average, quite low – as evidenced by a mean score of 56% (yes, that would be an “F” if not graded on a curve) on the below five-question quiz, known as the “Big Five” test by researchers. A survey conducted in 2021 found that less than one third of respondents answered at least four of them correctly, the threshold researchers define as “high financial literacy.” At least as concerning as the low test scores is the fact that the scores themselves have fallen dramatically between 2009 and 2021.

Are you seeing a pattern?

The useless question is “why” all this decline. Is it the phones, social media, microplastics, fluoride, the mentality that “kindergarten is the first step to Harvard” is less about upholding standards and more about suing teachers who give bad grades (just scroll thru the results)?

Probably all of them, I don’t know.

And then you have this response to Jared from our mutual friend:

The public discourse amplified by the rich and powerful is tuned to spread to the lowest common denominator. So the average person notices that rich people sound stupid and mistakes the mask for the face. The spread of information has also made corruption more obvious. That Trump’s favors are openly for sale is celebrated by his defenders as transparency. “They were all doing this, at least now we can see it”.

Fine.

I’ll let you keep that defense, but it’s hard to hear that without also hearing “we should all be allowed to crime”. Populism brings some unintentional equilibria I suppose. [I’m warming up to the idea of paying all politicians a salary of $2mm/year but making them truly public servants. All your financial affairs on full display. The fact that Congress can insider trade tells me we are so far from accountability with teeth.]

Adam’s observation is an instance of the current hypernym: honesty is for suckers.

Don’t get me wrong. This is a permissible instinct as trust in institutions disintegrates. But we risk some baby/bathwater mistakes if we malign all institutional failure as rot from within (university-industrial complex) rather than the natural difficulty of keeping up with accelerating times (securities regulation). Human affairs, the realm of politics and coordination, don’t move as fast the electrons re-shaping power and that impedance mismatch is a source of static. But that’s not nefarious. It’s just social physics.

That was a long digression to land me back where I was headed anyway — “be dumber” is an overfit to a moment we are all struggling to understand. It’s a retreat from responsibility. A cop-out. Hopium that there’s a quick way to get above this fray, shielded from the stray bullet from any of cultural ails lurking below the seemingly healthy SPX price.

I’m sorry but you can’t fake A yourself to flourishing. The flourishing is a by-product of the wax-on, wax-off. Confidence in your competence. Having some real to offer. There’s no “getting through this moment” because life is just one of these moments after another. So tie yourself to the mast of self-efficacy and it will all feel calmer.

If you tell me we’ve gained something from the loss of standards above, I’ll listen. But what hasn’t changed is you need something to offer. Society is not your parents. It doesn’t love you unconditionally. It’s hard to make beneficial choices if basic literacy and numeracy isn’t automatic. “I’ll just ask the LLM”. Well, knowing how to ask good questions itself takes intelligence and learning.

[Personal conviction…I think the quality of someone’s questions is a strong indicator of their thinking skills. This is pretty obvious if you spend too much time on X, but a universal example is to think about the last time a child asked you a question that had you go, “Damn, smart kid”. A know-it-all like the nasal boy in Polar Express comes off as obsessive, maybe smart, definitely annoying (although not a crime). But asking the right question reveals layers. For the finance heads, it’s why Jane Street uses this prompt in interviews — see thread. To just give an answer is to misunderstand the exercise.]

Ok, so the trends in reading and math say we are less and less prepared to engage in sophisticated reasoning. And we acknowledge that reasoning is important because it’s the basis of decisions and decisions are the bridge between our internal selves and our physical experiences and conditions.

How do we reverse the trends?

I don’t have an answer for society but I do have answers for you. And your family. And your friends. (“Hey, doesn’t that scale up to society?” That’s cute, did you just arrive from Mars?)

The answer has 2 facets and since we started in the context of math we will stick with it, but I don’t think it’s limited at all to math.

1) The belief that the process of learning itself makes you smarter

We all have potential. Just like in sports. You can’t be Usain Bolt but you can always get closer to your ceiling. We choose which domains to try to move closer to our ceilings since we can’t work on everything. We prioritize based on goals. Fitness, chess, cooking.

Math and literacy touch everything, whether you want them to or not. We are all touched by deals, contracts, transactions, even if we just want to paint. Youth is the rare stage of life where there is time carved out specifically for upskilling your general-purpose machinery of abstract thought, the manipulation of symbols, and the ability to maintain a chain of ideas inside one brain. I’m not sure if the appeal of doing so is universal, but the fact that games and puzzles are not compulsory and in fact pulled, not pushed, suggests that there is something intrinsic about cognitive self-improvement. Fostering this urge requires no justification beyond “it’s fun” but it happens to have salutory effects across your mental wetware and let’s face it, your job prospects, if you insist on being purely practical.

So this gift of time that children are afforded is when the skill of skill acquisition should be taught. I emphasize this because school is treated not as a place where we acquire skills but a place to trot them out for approval. The difference is insidious. As you traverse the years, it’s not what did you master, it’s what grade did you get? There’s really no emphasis on mastery. It’s just “did you go through the motions” for most, and then for the top students, who may or may not have achieved any type of mastery (and if they did it wasn’t to the school’s credit), the school is just a sorting hat. And with grade inflation a bad one at that, making students (and their parents) feel like college admissions is plinko.

My HS diploma-only mother emphasized school because education was the path to a better life. But she specifically stressed math because she thought it literally made you smarter. Her opinion is backed by nothing but intuition and self-flattery (she was a strong math student). But Ced, whose practice and writing is maniacally obsessed with the art and science of getting good at things and separating b.s. that sounds like it works from what actually works in complex domains, sent me a link to mathematician David Bessis’ interview with Russ Roberts:

🎙️A mind-blowing way of looking at math (Econtalker)

Bessis echoes what my little immigrant mom said. In describing what we need to do differently in teaching math, he argues we must not mince words to motivate:

I think teachers should be bold. They should say, ‘It makes you smarter.’”

More:

People hate math because they view it as an IQ test that they’re failing. And, it’s not a test. It’s a technique to get smarter.

If you’re failing, it’s normal because you start. When you start any new sport, you suck at it. There’s no way you’re going to be good on Day One. Just because a two-year-old is babbling, you don’t say: Well, I guess he’ll never learn to speak, but we just won’t bother teaching him language because he’s not good at it. And yet, we do that with math. We say, ‘Well, he’s not a math person. He’s not good at math.’

You cannot teach mathematics to kids who are convinced that your mathematical ability is something that is static… A combination of confusion about the nature of mathematics, and confusion about how the brain operates, and confusion about the origin of the shocking gap of abilities that are visible on a given day in a given high school makes us believe that this thing is entrenched and you’re not going to be able to change it. But it’s not true.

The failure of teaching mathematics—and it’s something that has been going on for not just centuries, but actually millennia—is the failure to admit that we do things in our head. We play with our intuition, we play with images, and these things have traditionally not even been discussed as being part of mathematics.

At school, you enter the room with your intuition, and the teacher is telling you that your intuition is wrong; and you reach your conclusion that intuition is bad and that you’re stupid. But, the thing is, it’s wrong, but it’s not going to be wrong forever. You will gradually evolve your intuition if you confront it with this very special apparatus that is logical formalism.

Mathematics is a technique that, if you learn how to master the technique itself, you will develop your intelligence; you will utilize your brain in a way that you would not be able to otherwise.

But this is really cutting to the heart of my mother’s hunch, which she couldn’t articulate:

I knew when I was a mathematician that what was really interesting to me was not the mathematics: it’s that kind of meta-cognition that you have to learn to become a mathematician. And this is the topic of the book. What do you do inside your head when you become better at mathematics?

It’s worth mentioning that much of the interview is spent on intuition and what Bessis, playing on Kahneman, calls System 3 thinking:

Whenever you catch your intuition red-handed being wrong at something, don’t throw that away. Don’t reject the intuition… Explore it. Try to unpack it… do back and forth until they agree. It may take you five minutes, one hour, a day, a week, a year, 10 years, 50 years.

Bessis argues that this process of confronting incorrect intuition is a uniquely valuable habit because it creates a highly memorable learning stimulus. This rings so true personally. When something goes wrong, when you are snapped out of autopilot, or surprised, the lesson you learn sticks with you.

His last inversion, namely, that math is not a test of smartness but it makes you smarter is a hokey story of being intimidated when Bessis noticed legendary mathematician Jean-Pierre Serre in the audience. After the Bessis talk, Serre said he’d need to repeat the talk because he “didn’t understand a word of it”. Serre was being sincere. Bessis noticed that most people would not admit to incomprehension so easily. And while it’s much easier to do so if you are Serre, whose capabilities are beyond reproach, Bessis wondered:

“Maybe with that attitude, you can become Jean-Pierre Serre.”

Ok, so the first step to improving our abilities in math (or literacy) is believing it’s possible and worthwhile.

The next step is to know how to actually acquire the skills.

2) Skill development is not the same as education

School is time-based education. You do X in 4th grade, Y in 5th and so forth. There’s some acceleration but it doesn’t stretch as far as individual variation because the range would be too wide to contain in a single classroom. The compression hurts not only the top performers but the bottom performers who are hanging on for dear life only to be waved through to the next grade, where the deficiencies compound.

Skill development is rooted in learning science. You are far more likely to have encountered its prescriptions in sports or music than school. I encapsulate a lot of that information in The Principles of Learning Fast. But today I want to zoom in specifically on our foundations because it’s an actionable target if you are insecure about your knowledge and how to go about learning to mastery since you may have never realized that was an option. How could you have realized that…there’s a test tomorrow you need to study for even though you don’t understand the material from last week’s test, right? It’s not your fault but hopefully what you’re about to learn can serve you and your loved ones going forward.

I’m going to let Alpha School’s Joe Leimandt be the messenger. The following flow comes from an interview he did with Patrick O’Shaughnessy.

🎙️Building Alpha School, and The Future of Education (Colossus)

1) Knowledge is hierarchical

Most of knowledge is hierarchical where it’s based on foundation. Algebra is basically advanced fraction manipulation. Fractions is multiplication and division. And you can just keep going down the tree where you have to actually learn bottom-up and have mastery.

2) Well, what is mastery?

Think of a sports analogy like in basketball. If you’re the point guard and you lose the ball 30% of the time going down the court, the coach is not going to be like, hey, let’s work on the alley-oop. They’re going to be like, okay, let’s get back to the basics and master the basics so you can get down the court.

Have you mastered the basics? How good are you? We always talk about in standard school, there’s a whole set of things that 70%—you’re passing, you don’t know 30% of the material, and then they move you on to more advanced things.

This is pretty obvious stuff. You know how this feels:

3)The Swiss Cheese Problem

The problem’s not the algebra, it’s the prior knowledge… if you’re pushing people up and they’ve only learned 70 or 80% of the curriculum, you should think it’s like Swiss cheese. It’s like you’re building a foundation with all these holes. And then eventually as you get high enough, it just gets too much and it collapses and you can’t learn anymore.

4) Going Back to 3rd Grade

If you’re doing fractions and you haven’t mastered division, you’re going to sit there and say, God, this fraction problem is really hard. But the real issue is, well, just go back and learn your division and then the fraction’s going to be easier.

We have one student who was, this is sort of a unique, an extreme example and I hesitate to say it but we had a student who was 740 on the math SAT and in looking they were making careless errors. Some of the problems they were overloading working memory and for whatever reason the student didn’t have fluency of multiplication and division tables. So we literally sent her back to third grade math.

We’re the only school in the world who will take a 740 math SAT student go back to third grade, send back and she got a 790, a 790. And it’s that kind of thing where when you talk about the science of learning and just I say it this way, the parent and the student in this case were not excited that their 740 math student is being given third grade problems. That can’t be the issue, but it is. It is, because you’re overloading the working memory and she’s just making careless mistakes.

My eldest is 12. I keep telling him that the form on his basketball shot is off. He finally asked me to show him a video of him shooting. After seeing it, HE decided he wanted to correct it. He understands it’s a step back to go forward. I gave him tremendous praise for the decision because it’s not easy to make choices like that. It’s an investment in the bigger picture

[He’d like be able to make the HS team and it’s gonna be competitive. His current shot won’t cut it, especially since I don’t expect he’ll be very tall.]

My wife is going to start Math Academy because she sees the kids’ work and, well, there’s lots of swiss cheese in her knowledge. She decided that didn’t sit well with her. The kids asked her what level of math she’s gonna rebuild from and while the diagnosttic will place her, she has no shame about however far it suggests. The 12-year-old would bet he’s ahead and she’s not taking the other side of that.

Everyone is anxious about time. Finish so you can get to the next thing and the next thing. I’m very sympathetic. Things just feel like a race. Business is often a race. It’s hard to backfill expertise or keep up with all the cool new stuff when you’re putting out fires. So I don’t know to what extent we as adults can choose mastery for ourselves. I don’t pretend to know your constraints. But when it comes to the kids, I urge you to think about this stuff. You know what it’s like to have swiss-cheese in your foundation. Holes are not totally avoidable. But rushing to check off “done” is training for a life of cramming. Of seeing a stimulus to grow as an obstacle to relaxation rather than an opportunity to expand your capacity to offer something to others.

That’s a real goal. Not a fake one. Getting there takes as long as it takes for you. But once you’re there you can’t be shaken because the foundation is rock solid. The title of today’s letter is hook to remind you:

Slow is smooth, and smooth is fast

There’s no shortcut to smooth.

Money Angle

A friend was asking me how to deal with a loved one who had put nearly all of his assets into a particular volatile stock and done very well. So far. The person is in their 30s with a family and my friend is concerned that if things go the other way this could be the type of thing the household might not recover from.

I asked the basic questions which of course my friend also asked. What’s your plan if the stock falls? “Probably buy more”.

Do you have a target where you’d be willing to sell any of the shares? “If it doubles again, I can retire so nothing before then.”

We can sit here and talk about risk management and yadda yadda. But I’m gonna share something personal which makes me think this has nothing to do with rational finance thought.

I’m close with people that have been taken in by pretty obvious scams. All the red flags. But the people I know are smart people. People that can compute an interest rate and all. They don’t tell me about the “great opportunity” because they know I’ll plead with them to not do it.

Predictably, they get burned. (I’m not supposed to know that because they don’t want to hear I told you so. But I know.)

They fall for this because they want to believe so badly that their better judgement doesn’t stand a chance. I’m totally nonplussed by this. It’s fascinating that we are capable of this. It explains quite a lot, good and bad, actually. But it’s not suprising if you pay attention.

But here’s the part that I found surprising and discovered on a lark.

In the aftermath of the scam, I spent 2 hours on the phone with a victim. I was standing in my kitchen of the last house. Beautiful day outside. Brutal conversation. Emotional. Just trying to make sense of it in a way where we could at least salvage some vague sense of growth out of the closure. At the tail end of our call, I asked a question that I still find peculiar but somehow felt appropriate:

“Did you need to lose that money?”

Silence.

I could hear them think.

“Maybe”.

We talked about it. There was nothing that could have been done. No warning I could have given would have talked them out of it. They admit to that.

I think about this a lot.

I told my friend whose concerned about their loved one this story. And the friend’s face dropped. They know what they’re up against.

(We actually came up with 2 proposals that he could bring to the loved one to change the shape of this death wish, we’ll see if either find reception.)

Anyway, as BTC has been dropping, this thread has been on my mind because there are a lot of cult leaders who benefit from persuasion but aren’t accountable to their followers’ families if they’re wrong.

I’ll just leave you with a tweet I sent Tuesday:

Sitting down at a table without a budget is a commitment to playing til you’re wiped out.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• trader is a uselessly broad term
• positive delta puts
• Annual moontower.ai sale 20% off

Friends,

The largest firms in the world’s capex doesn’t lie. They’re all-in on AGI. Since the so-called hyperscalers are also a historically disproportionate share of the SPUs, they are dragging the entire economy into that bet.

The “dog with a mouthful of bumper” outcome is they are right and actually eat the whole economy, only to be murdered by their own bunker guards. The irony of using Sama’s ChatGPT to query this:

OpenAI’s fundraising appetite and valuation requires AGI to be a thing, whereas a company like META will survive as a going concern and may even get stronger despite the capex blowing a big hole in their balance sheet temporarily if AGI is not a thing. Yann LeCun, META’s chief scientist and Turing award recipient, is leaving the company. He’s critical of the “scaling hypothesis” which claims that if you just keep throwing compute and data at the models, they will become “intelligent”. He doesn’t see how causal reasoning would ever emerge from pattern-matching even if it’s the most superior pattern-matching the world has ever seen.

This debate feels like mommy and daddy are fighting while the family’s future hangs in the balance. The naughtier kids are using the distraction to raid the cookie jar, while the market’s spirits are a thermometer on who the rest of the kids want to side with.

In a Carlota Perez framework, the prospect of AGI would suggest we are still early in the installation phase, but if the common knowledge surrenders to” AGI is never spawning from the current soil” then we are probably already in the deployment phase but not every middle-manager has taken Prompting 101 yet. In the first case, the calls aren’t hot enough, and in the second, you want your stocking stuffed with puts. Either way, we’ll take the electricity. But Santa, gas not coal, please.

Below the sci-fi (is that science fiction or science finance?) theatrics, we have the mundane business of actually using these things. Last week I shared the listicle voting app thing with some resources for those who want to make stuff with LLMs. This week Khe had a detailed post describing a CRM he built:

Vibe coding? More like “whack-a-mole” coding: The uncomfortable truth around my Pebblr CRM app (link)

Here’s another fantastic article that I think captures nuance between AGI breathlessness and very real capabilities of LLMs today.

Is Vibe Coding the Future of Skilled Work? (Scott H Young)

It’s written from a relatable perspective since I’m using these things so much, while easily admitting they are enablers rather than substitutes. And isn’t that a sweet spot? Like you can do more but still matter? Well for now I guess. We’ll see what happens. If the puts pay off maybe that’s bullish for humanity.

I’ll share some vibe-coding projects here and there.

Here’s my Car Lease Embedded Option Calculator.

Some background for the uninitiated:

• Car Straddles
• Are car leases confusing?

Money Angle

A traditional way to think of a stock price is the expected value of its future prices weighted by their probability and discounted to the present. Ignoring the cost of money, in a binary world a $100 stock could be fairly priced if it was 50/50 to be worth $200 or $0. It is also fairly priced if there’s a 20% chance of it going to $500 and an 80% chance of $0.

There’s this vocal VC named Keith Rabois who aggressively cheerleads his companies. I don’t know the guy. His online persona exudes many standard deviations of F-U confidence. Sounds par for the uber-rich these days, but he’s extra fun because he’s pugnacious. And got baited into a silly pride bet.

Here’s a tweet from investor @compound248:

We wouldn’t talk about this in the Masochists section because this is fairly basic financial reasoning. The type that really needs to obvious to everyone in a society is flirting with a simulcrum of the movie Rat Race. But it’s appropriate to spell out the opportunity here in gambling terms.

Keith is offering an even-money bet, his $100k to Compound248’s $100k on the stock multiplying by 31.5

If you think in odds:

Keith is offering even money on a 30.5-1 odds proposition

That might be more clear when you think of Keith buying the stock. If he buys $OPEN he risks losing the stock price or 1 bet and if the stock goes up 31.5x he wins 30.5 (because the 1 bet or amount of cash he spent for the stock is not part of his win or return).

It’s similar to how a stock 2x’ing is 100% return, or 10x’ing is a 900% return. A stock that 10x’s paid 9-1. You risked S, you won 9S if S is the stock price.

Normally when you buy a stock, you get paid dollar for dollar as it moves times the number of shares you have. If the stock doubles you make S in profits which is how much you risked when you bought it. You are paid in proportion to the move.

Keith needs a heroic move to simply get paid even money. His proposition is an arbitrageable violation of how return works. I don’t know anything about Compound248’s outlook on $OPEN by him taking the bet. He could be bullish or bearish. When you hear the proposition, your mind shouldn’t go to “Is $OPEN a good or bad investment?” because what you should do doesn’t depend on this assessment.

Keith’s offer is free money regardless of your outlook.

He’s laying 30.5-1 odds where the max loss is $100k.

So you solve for “How much OPEN do I need to buy to make a $100k profit if it pays 30.5-1?”

It’s simply:

1/odds * bet size

1/30.5 * $100k = $3,280.21

I need to buy $3,280.21 worth of shares. Since the stock was $8.48 that’s just about 387 shares.

If the stock goes to 0, you lose the $3,280.21, but Keith hopefully pays $100k. If the stock does go up 31.5x, you break even.

You could also structure the hedge so that at a stock price of 0, you break even. You buy $100,000/$8.48 or about 11,792 shares. If the stock hits Keith’s bogey you get paid 30.5 on your $100k and you happily peel off 1 bet size to him as a tip. Any share quantity you buy between 387 and 11,792 is a guaranteed win.

An amusing post-script to this story is HF manager Benn Eifert requesting $10mm of action on this proposition. Of course, Keith said no — he’s confident not stupid. Keith said he did the bet with Compound248 just to shut the “troll” up or something.

I don’t understand how rewarding a troll with the easiest money I’ve ever seen is anything but encouraging future trolls, but maybe this is why Keith is rich and I’m writing on the weekend.

Money Angle For Masochists

Tomorrow, we are going to launch the annual Black Friday/Cyber Monday discount for moontower.ai. It’s the only sale we offer during the year (current subscribers will be able to extend at the discounted price as well).

The app’s selling point, what makes it different, is its “point of view” on vol. It really starts from “what’s normal in the options market now” vs what sticks out. The analytics are geared towards answering that question because that’s how you find contradiction.

If sunscreen and umbrellas are simultaneously expensive, it might be because there’s a sunshower expected — but do the odds make sense? Before you could even reason about that you needed to know that sunscreen and umbrellas were both expensive in the first place, otherwise you wouldn’t even consider the question. Questions are where opportunities live.

The price of options is summarized by properties of vol surfaces, which in turn, can be compared to each other. We do the measuring and comparing to point out where the questions are. Options are not as simple as point spreads. Strikes themselves are fixed but the stock price changes, time passes. That same contract’s properties morph like natural landscape seen through a time-lapse camera. We are your guide in this wilderness.

We surface what types of trades look relatively attractive from the vol trader’s vantage point. You can think of that as a solid hypothesis based on the data, but from there, you can adjust based on your knowledge or opinion of what is going on in the name.

We don’t make guesses about the future. We don’t say do X and you will make money. It’s obvious to anyone who has ever taken risk that handicapping the future is not enough to make money. Think about it. How confident are you that the current price of SPY is not the all-time high? Probably 100% and rightfully so. The “SPY to be up 1 cent” one-touch option would be priced at 99.99999% percent. The knowledge is replacement-level not value-add.

You don’t sign up for Bloomberg because it tells you how to make money. You sign up because it helps you see*. And seeing in the correct terms is a prerequisite to profitable decisions. It’s the base of the pyramid upon which you layer the rest of your process.

That’s what we’re solving for in the options niche. The vol trader’s lens.

I made these vids this past week to offer a concise description of some of the key tools for seeing like an option trader:

*When you sign up for analytics, you usually do so knowing what you want to see. But also, there’s a built-in education. You learn what matters to others as well. Digital real estate is not scarce but deciding how to fill it is still constrained by taste and demand. The option pricing software that I used in market-making was also full of clues about best practices because professional users drove the features. What’s interesting when you have an analytics product that serves both retail and enterprise is the features can be a weaker signal about what matters. B-to-B vs B-to-C.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• Automation
• Moontower Binomial Tree Explainer

   

Friends,

I really liked this listicle by Sasha Chapin:

50 things I know

I was gonna do my usual thing of sharing which items from the 50 resonate most for me.

I’ll give you one.

11. I know that talent doesn’t feel like you’re amazing. It feels like the difficulties that trouble others are mysteriously absent in your case. Don’t ask yourself where your true gifts lie. Ask what other people seem weirdly bad at.

But what I want to know is which of these land for YOU.

This was an excuse to do a project.

Here it is…go vote:

https://sasha.moontowermeta.com/

I have been doing a lot more vibe-coding recently. This project was an excuse to make something that required a database backend to record the likes and user sessions.

I used AI to then document the process which you can read about here:

General environment and stack:

👨🏽💻Setting up Git + Vercel + Terragon

Specific for the sasha voting page:

☕1-page guide

🔍Detailed tutorial

You can find a new portal here and in my signature down below:

🤖Resources to Get More Out of AI

Related and timely — this week Khe documented making a CRM which is the next-level up because it uses authentication (ie username/password to login):

I coded an entire CRM from scratch

If there are any resources you love as you explore, feel free to share!

---

Money Angle

Essential Wisdom from Twenty Personal Investing Classics (6 min read)

Elm Wealth distills investing lessons from 20 classics, cross-referencing them with James J. Choi’s paper Popular Personal Financial Advice versus the Professors (Journal of Economic Perspectives, Vol. 36 No. 4) that analyzed advice across 50 best-selling personal-finance books, revealing where popular wisdom aligns (or clashes!) with financial theory.

This stood out to me:

Bear in mind that the first twelve books listed above are written for the broad audience of all investors in developed market economies, with particular focus on US investors. It is well-known (and disturbing) that the financial literacy of this audience is, on average, quite low – as evidenced by a mean score of 56% (yes, that would be an “F” if not graded on a curve) on the below five-question quiz, known as the “Big Five” test by researchers. A survey conducted in 2021 found that less than one third of respondents answered at least four of them correctly, the threshold researchers define as “high financial literacy.” At least as concerning as the low test scores is the fact that the scores themselves have fallen dramatically between 2009 and 2021. If you decide to read some of these books, don’t be surprised to find a good deal of the advice proffered seems blindingly obvious if you come to them with above-average financial sophistication.

Umm, the quiz:

With the growing zoo of money distractions (crypto, gambling, prediction markets) and the results on that quiz, I’m guessing a large swath of society is gonna feel like there’s a financial tapeworm in their wallets.

I tweeted this a few days ago:

Let’s focus on evergreen financial hygeine. These were common themes I saw in the books Elm Wealth selected:

• Diversify. It’s the rare free lunch: combine two assets with equal expected return and volatility, and your portfolio’s risk-reward improves.
• Minimize frictions. Avoid fees, taxes, and excessive trading.
• Reduce touchpoints. The fewer chances to act on emotion, the better your long-term results

Just to piggyback on the diversification bit. It sounds trite, but you’ll hear some people push back against it with the buzzword “deworsification”. When you’re as smart as Warren Buffett maybe you can use this word. But Buffet himself recognized Ed Thorp was a genius despite Thorp’s strong conviction in diversification. [And vice versa, by the way. Thorp’s recollection of hanging out with Buffet when they met in their 30s is pretty heart-warming. Game recognizing game. Apparently, after dinner Buffet showed Thorp a toy he really liked — non-transitive dice. Think of them like roshambo. A beats B which beats C which beats A.]

Here’s the cold-ass truth. Not diversifying is incinerating money. Looking back at your concentrated outcome and saying “see” is not proof of anything but survivorship. In fact, you can prove mathematically that diversifying is a free lunch.

What would you rather own?

Portfolio A: a single stock with an expected return of 10% and 30% vol

OR

Portfolio B: an equal-weight portfolio of 2 stocks where each has 10% expected return and 30% vol but are 70% correlated

💡Stuff you can read if this is not clear:

• You Don’t See The Whole Picture
• Your Portfolio Intuition Is Poor
• Why You Don’t Get Paid For Diversifiable Risks
• Is There Actually An Equity Premium Puzzle?
• DCF As A Lower Bound

The proof is sitting there in market prices too. A diversified portfolio of inferior credits will have a higher rating than the bonds in the basket. A higher rating means a higher price (lower yield).

The nuances of that are better understood today than they were in the heyday of CDO-squared.

🔗See the GFC through a quant’s eyes

Of course, diversification always means you left something on the table in hindsight. You sign up for FOMO. But this is the nature of every decision. If you get crushed, you wished you traded zero and if you win, you wish you traded more. Results alone tell you nothing about the quality of your shot.

To complete the point:

“If you invest and don’t diversify, you’re literally throwing out money,” stated Jeff Yass. “People don’t realize that diversification is beneficial even if it reduces your return.”

Why is this the case? “Because it reduces your risk even more,” added Yass. “Therefore, if you diversify and then use margin to increase your leverage to a risk level equivalent to that of a nondiversified position, your return will probably be greater.”

The modern pod shops are another triumph of diversification, which takes us to the next section…

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Money Angle For Masochists

I am impressed by the multi-managers on the whole. They continue to generate positive returns with outstanding Sharpe ratios and thus far don’t capture the same downside as conventional 60/40 portfolios.

I think of them as the holy grail marriage of deep security research that you would have associated with a long/short fundamental manager plus the quantitative risk management and attribution metis that prop trading firms trading their own money have accumulated through the decades.

Many investors, usually from the cheap seats, want to hate on them because they don’t match the SP500 plus their pass-through fees are multiples of typical fees. Not to mention, hedge fund managers are just natural villains to normal people who maintain a Richard Scarry worldview about which jobs are valuable (eh, like any competitive profession, some of them are decent and some of them are vampires).

Regardless, this quote from Byrne Hobart conveyed something I never found the words for, so as soon as I read it, I had to clip it.

From Why Does Volatility Matter?:

If the portfolio you’re looking at is 100% net long conventional asset classes, and if you think it’s absurd to pay high fees in order to match the S&P with less liquidity—lucky you! You’re part of society’s financial shock absorber, a middle class or above saver in a rich country with functioning capital markets. But if you’re in that position, there’s a very real sense in which joking about how the S&P has outperformed complicated multi-manager setups year-to-date is a form of financial punching-down. They have a different benchmark, and a harder job. And they’re doing you the very generous service of ensuring that the next time you buy the S&P 500, the price of every single component reflects the collective attempt by thousands of professionals with massive data and analytics budgets who are all trying to push the price 1% closer to optimal.

---

I want to share another post from Andrew who I introduced last week.

So-Called “Bonds” in Prediction Markets

Great subtitle:

Rare events teach slowly

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• why poker is used to train traders
• American options are not vanilla

Friends,

The phrase “studies show…” is almost always followed by bs. To understand why, I’ll point you to a post by David Epstein.

David is the author of Range, The Sports Gene, and the new book Range Adapted for Young Readers which I bought for my 12-year-old son and nephew.

I’ve been a long-time reader of David’s letter and this post is both useful and timeless.

Everything in Your Fridge Causes and Prevents Cancer

It’s a reminder that outlier studies and results in general make headlines, but are statistically inevitable if you do enough studies.

Excerpt:

It wasn’t every sauna enthusiast who reaped the supposed protective effect against dementia; it was specifically those who used a sauna 9-12 times a month. Sauna bathers who hit the wooden bench 5-8 times a month — sorry, no effect. And those who went more than 12 times a month — again, no luck.

That should raise a caution flag in your head.

When only a very specific subpopulation in a study experiences a benefit, it may indeed be that there is some extremely nuanced sweet spot. But it is more likely that the researchers collected a lot of data, which in turn allowed them to analyze many different correlations between sauna use and dementia; the more different analyses they can do, the more likely some of those analyses will generate false positives, just by statistical chance. And then, of course, those titillating positive results are the ones that end up at the top of the paper, and in the press release.

Here’s the point I want to hammer home: when you see a tantalizing health headline — like that saunas prevent dementia — keep an eye out for indications that the effect only applies to specific subgroups of the study population. Even if the headline is very authoritative, revealing nuggets are often buried lower in the story.

I want to stress that you shouldn’t assume the sauna results can’t possibly be true. But when you see Bears-undefeated-in-alternate-jerseys type conclusions — and someone is claiming one thing causes the other — you should hold out for more evidence.

This doesn’t just happen in health news. Investing/trading is another area where making a mountain out of a statistical molehill is rampant. Unless you are specifically studying a phenomenon that you’d expect to be discontinuous (binary, “phase change”, threshold cutoff) you should be wary of any signal from a specific range of an otherwise continuous function.

I’ll take a simple example from Kris Longmore’s article explaining how month-end rebalance trades work. The post is titled How Wealth Managers Pay You To Trade. He writes (emphasis mine):

How I’d Test This

So here’s the hypothesis: if we can identify which asset outperformed during the first part of the month, the underperformer should outperform as we approach month-end, when rebalancing pressure is likely to be greatest.

The first step is simple. Pull daily data for SPY and TLT going back as far as you can get it (I used data from 2007). You can get this from Yahoo Finance – nothing fancy.

Then ask a straightforward question: If I know which asset outperformed during the first 15 trading days of the month, can I predict which will outperform during the last ~7 trading days?

Why 15 days? Because it’s roughly two-thirds of a trading month, and it gives us a reasonable window to identify the outperformer before month-end rebalancing kicks in.

Could you use 10 days? 20 days? Sure. But 15 seemed reasonable and shouldn’t really matter much. If it did, then that would be a big red flag. We want stuff that’s fairly robust to the actual implementation details.

Back in my floor days my biz partner was incubating a futures trend strategy and he’d have me look at the backtest results. I’m no scientist, but I knew enough to realize that if the signal depended on a particular value of the parameter (ie the exact amount of what defined a “breakout”, the number of lookback days, etc), then the result was overfit.

It’s the same idea as David’s sauna therapy study.

When you are in a competitive domain where many people are constantly mining, “too good to be true” discoveries should be met with extra skepticism.

A current example of this is the so-called Mississippi Miracle in which both the left and right appear to have an axe regarding the childhood literacy improvement in Mississippi schools. It checks the box of “domain where many people are constantly mining” so interventions that show huge returns deserve a lot of skepticism. You can count on Freddie deBoer to deliver that, but I think the pushback in the comments section of his post show the complexity:

There Are No Miracles in Education

 

Would be interesting if there was a prediction market on how much literacy scores would improve in places that decide to adopt the Mississippi approach?

Which brings us to this week’s Money Angle, which should get a rise out of you…

Money Angle

Prediction markets are all the rage. They even played a main character role in an episode of South Park just a few weeks ago with Kalshi being specifically shouted:

 

On Friday I shared a rare interview with SIG founder Jeff Yass that came out this week about prediction markets:

 

On the subject of prediction markets, long-time Moontower sub Andrew Courtney has launched a substack with many of his recent topics being analysis of prediction markets. His thought processes look familiar because…well, Andrew retired quite young being an extremely successful SIG trader himself.

You can get started with these posts:

🔗from the Kalshinomics Lab: conditional election probabilities

🔗are you good or just up?

🔗Relearning Math at 38 — Andrew was at the top of the Math Academy leaderboard for a bit which iirc corresponds to learning math with the same time commitment as a full-time job. My kids and I have looked at the top of the list thinking “who the heck are these people?!”. I was envisioning autistic homeschooled kid not retired SIG trader.

Finally, this is also Andrew’s site:

Kalshinomics

If you are in the Philly area, he’s done meetups for prediction market enthusiasts.

Fun fact: I told Andrew I was going to boost his awesome letter this week and I asked him to make me a market on how many subs it would lead to.

He gave me a 90% confidence interval which I thought was a good market although too wide to trade on. I showed him a 175 bid if he wants to hedge his happiness. We’ll see what happens.

Good handicapping practice would be to try to list the info you’d like to have in making such a market!

Money Angle For Masochists

The “Masochists” header word this week is a pointer to “aspiring traders”.

I’m going to reprint Joel Rubano’s tweet in full. Joel is a friend, energy trader, author and entrepreneur running a corporate trading education company with a focus on commodity trading and hedging.

His book: Trader Construction Kit

The tweet pairs well with the post from last week’s so you’re interested in trading.

Joel:

I had the opportunity to guest lecture to a university class yesterday and got some questions about resources for students interested in working toward a trading seat.

The good news is that there are massively more and better resources available now than ever before. The bad news is that for every useful book, class, or podcast, there are 999 more that are worthless at best and massive value destructors at worst.

A few hints to help sort the wheat from the chaff:

Anything that tells you trading is easy is lying to you. Trading is a brutally hard game played against literally the smartest, most disciplined, most aggressive people in the world. The people who survive and thrive tend to welcome that specific challenge, even though most would not describe their time on the desk as “fun.”

Anything that claims a risk-free or can’t-lose strategy is garbage. Most professional traders are hoping to be right 50–55% of the time and relying on extremely strict discipline and risk management to be profitable with that hit rate. They also have to manage capital so they can survive stretches of worse-than-normal performance, which invariably happen.

Anything that tries to sell you trading as a lifestyle — the cars, the watches, the vacations — is almost certainly a scam. Real traders are not sitting there thinking about what the money buys in real time; that’s distracting and leads to bad decisions. There’s even a famous passage in Reminiscences of a Stock Operator about a group of traders who all try to make enough money to buy a fur coat, and they all fail because they were focused on the coat instead of on playing the game well.

Anything that says “anyone can do it” ignores how markets actually work. Most markets are zero-sum: people have to lose for other people to win. The softer version — that anyone can become a trader if they just grind — is also not really true. The job demands unusually high levels of discipline, curiosity, intellectual honesty, and competitiveness. Some people have those traits and can develop into professional traders; most people don’t, and that’s fine. The good news is that there are lots of trading-adjacent roles (risk, research, sales, tech, execution, ops, product) that let you work on markets, think about markets, and have a productive, interesting career without being the person taking risk.

Anyone promising something “just like what the pros use” or “better than the professionals” does not understand what professionals actually have. Elite hedge funds, banks, and merchant trading firms spend huge amounts of money on proprietary tools, data, infrastructure, and staffing to compete in an intellectual arms race. A single trader can easily consume hundreds of thousands to millions of dollars’ worth of technology and information resources per year, which is one reason their profit targets are so high. You are not getting that for $29.99 a month.

Anything that claims “the edge is AI” with no further detail is almost certainly not going to outperform anything. Yes, serious trading firms are racing to integrate AI, and yes, AI will be useful for specific tasks. But AI is very good at some things and still not very good at others. If someone is just putting a thin interface on top of a generic stock-picking model and calling that “AI-driven alpha,” it’s not only unlikely to be useful — even if it does work for a bit, it will almost certainly get out-competed by more specialized, internally developed tooling at a bank or hedge fund.

Ultimately, if you’re serious and you’re early, your main job is not to find a shortcut; it’s to build the traits that compound: discipline, honesty with yourself, curiosity, and competitiveness under stress.

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• roundups
• deducing the market-maker’s fair value
• Spooky? Jeff Yass on Prediction Markets