Moontower #199

The undisputed heavy-weight champ of finance writing is Matt Levine. I’m 4 bid on how many chuckles you’ll get per letter. I wouldn’t sneak-read his stuff during a meeting — there’s always literal LOL risk.

But it’s not just the humor. Matt Reustle and Dom Cooke, hosts of Making Media, put their finger directly on Levine’s appeal in their recent interview with Levine.

Matt. R: [00:53:12] He has basically carved out this category where when you see certain things hit the tape, you say to yourself, I can’t wait for Matt Levine’s interpretation of this. And that’s such a symbolic thing that I think many people probably strive to have, and he clearly has achieved them. I love that.

Dom: [00:53:30] I think it’s stronger than that as well. It’s not even like I want to hear what he’s going to say. It’s, I need to know what I should be thinking about this topic. And he’s the guy that I trust. Tell me what I should be thinking about it. And there are a few people in that account in different topics or verticals, and he’s definitely there in finance for a lot of people.

The interview is a lot of fun and the hosts stand out for asking great questions. Stuff you really want to know.

🎙️Matt Levine – Wall Street’s Art Critic (Making Media)

A couple of my observations:

1) The nerdcall. Matt recognized that weird, complex deals and concepts appeal to technical people broadly — whether they are in finance or not.

Very early on, my sense was that there is an expectation that weird complicated niche topics have only weird niche audiences and that doesn’t seem true. I think my readers, some of them are people who work in fairly technical areas of finance are like finally, I get to read about this fairly technical or like, I get to read about this adjacent technical area of finance that I find interesting because I work in a different technical area and I like technical stuff.

A lot of my readers work in tech and they’re like, “I don’t share anything about finance. I share about finance, I’m not that interested in it, but I like when you talk about complicated things. It’s like the aesthetic appreciation of systems and complexity and the moving parts of the economic drivers of deals.

My impression is that there are a lot of people in the world who want to read about structures and there is not a lot of writing. So they go, great, I get to read about the derivative, fabulous. So I don’t know, that’s sort of the answer to your question. If I were to explain a complicated thing it is going to be fine, like those are going to be good.

This overlaps with my observation of game nerds. I pulled this from an interview with game designer Raph Koster:

Finding real world systems and abstracting them or boiling them down to their essence isn’t actually a very common skill. Games can teach people how to do this. The idea involves setting constraints, modeling real systems, and allowing people to experience them within a game context to understand them deeply. It provides an opportunity for individuals to experiment with these systems, unlike in real life where, for example, you only get one shot at lifetime earnings. Playing a game that emulates this system offers lessons.

I believe that game-playing trains your systems thinking and reading Matt Levine does too. It’s a lot of “how would you expect this to behave at equilibrium and under what assumptions, but we actually observe X so what assumptions are broken or what did the model fail to consider that is true now but wasn’t before”. I give a few game examples in Lessons from Game Designer Raph Koster.

2) Matt explains the benefits and costs of the growing trend of “creators” becoming the farm team for the journalism world. He namedrops a great example —

(fun fact Kyla’s newsletter is the single largest Substack referrer of Moontower subs. Thanks Kyla!)


I was just reading Matthew Yglesias this morning, talking about how the journalism career path that used to be, like a small town newspaper to a big city newspaper to The New York Times. And now you started a blog covering national politics and you move to The New York Times.

And I think from my entire time in media, the old model had been replaced by the model of you start at Gawker or Gawker, in particular, became like the feeding ground for media organizations. And now blogs have declined and creator stuff has increased and like Bloomberg works with Kyla Scanlon who’s this great financial content creator. And yes, totally, that’s the future.

I just think it’s easier for people now to just go to a place, you can talk about whatever that has a national or international platform and then they do stuff. And if this stuff gets traction, they’re like, we don’t need to work your way up. Obviously, there is something lost there. We’re like the advantage of being trained at a small town newspaper is you learn to report.

I find it helpful in my career that I started by doing law and banking. So that what I came with when I started writing was not just attitude and style. And there’s a risk, if the training ground for media is starting a YouTube channel when you’re 18 or starting a TikTok when you’re 18, then people will come in with less training, either in reporting or in a substrate that they’re talking about. The upside is that then you come in with the skills that are helping you to building an audience, there’s a trade-off there. I don’t come in with reporting skills, really.

Levine is validating a trend that traditionalists ignore at their own peril — public proof of work is a gate-keeper bypass. [Mark Andreesen discussed the nuance around this in the context of whether one should go to college.]

The trend is not without trade-offs but it’s also not going away. I’d bet on it accelerating. If a resume and references are your only proof of work that’s effective because there are plenty of opportunities that don’t require more. But writing, building, and creating publically are a lot of additional “interview-like” data points that expand the surface area of opportunity. But it’s work. There are no shortcuts anyway, you work one way or the other. (Reminds me of maintenance costs for a home — you can defer them and one day you’ll pay for it with a lower selling price or you can accrue them as they come).

If you’re drowning in info, a trusted source, curator, and really, a second brain, like Levine is saving you time and attention. Media companies understand the value of this. Many brands understand this. The marketing departments of the remaining companies will catch up. And in a world drowning in info, everything is sales. More value will accrue to trust. Feels like one of those big trends that is happening in the background that you can align with to your advantage.

Money Angle

I’m working on some investing education stuff for some friends and family. That led me to resume work on, a series where I explain how people should approach investing. The target audience I keep in my head is a fictional friend who has accumulated some savings, is not in finance, and has no process. Someone who keeps bouncing from one stock tip to another. Or doesn’t have a cohesive understanding of what the “investing problem” even is.

The goal of the series would be to either help them realize they can manage their own savings in a way that is mentally organized or maybe just realize they should hire a financial advisor.

I’ve shown many people in the past 6 months how to log onto Vanguard to simply buy t-bills. They didn’t know this was a thing. This ignorance is normal and understandable. Many people with savings don’t know how finance and investing work and many others find thinking about it a chore they’d rather ostrich.

This series is a 101 for understanding the nature of markets and risk and ultimately taking the reins in a coherent way that doesn’t require much maintenance.

This week I published the next section:

❓Where do investing returns even come from? (Moontowermoney)


Money Angle for Masochists

Just a few screenshots for your ponderance:

By @EMinflationista:

I’ll never be allowed on a crony committee:


Stay groovy ☮️

Moontower #198

I saw this tweet from David:

Everyone understands this feeling.

I heard an interview recently that discussed the psychology behind this behavior.

I’ll cut to the link:

🔗David McRaney on EconTalk

Episode description:

To the Founding Fathers it was free libraries. To the 19th century rationalist philosophers it was a system of public schools. Today it’s access to the internet. Since its beginnings, Americans have believed that if facts and information were available to all, a democratic utopia would prevail. But missing from these well-intentioned efforts, says author and journalist David McRaney, is the awareness that people’s opinions are unrelated to their knowledge and intelligence. In fact, he explains, the better educated we become, the better we are at rationalizing what we already believe. Listen as the author of How Minds Change speaks with EconTalk host Russ Roberts about why it’s so hard to change someone’s mind, the best way to make it happen (if you absolutely must), and why teens are hard-wired not to take good advice from older people even if they are actually wiser.

The best teaser for the interview comes directly from it when McRaney says:

The incepting point of this book was someone in a lecture came up to me and asked about their father who had slipped into a conspiracy theory and they said, ‘What can I do about that?’

And, I told them, ‘Nothing.’ They said, ‘How do I change his mind?’ I said, ‘You can’t.’ And, I really felt, the second I said it, that: I don’t know enough about this to say something like that. I don’t even know if I believe what I just said, but I know one thing I don’t like this attitude I have about this issue. I should at least learn more about it.

And, if I was in that same situation today, I would actually be able to say, ‘Oh, here’s what you should do. Here’s what you should say.’ I no longer believe anyone is unreachable. I no longer believe anyone is unpersuadable.

In conversations that don’t work out the way we think, we blame the other side. We say, ‘They’re dumb. They’re mean. They’re evil. They’re ignorant. They are unreachable, unchangeable, stuck in their ways.’ These are all things that we are using to forgive ourselves for failing.

Listen to the interview. My excerpts are just what I wanted to keepsake. My notes covered:

  • motivated reasoning for social acceptance
  • the process of radicalization
  • reactance (or what I call “reflexive contrarianism”)
  • shaming
  • specific approaches that work to unblock discussions
  • “street epistemology”
  • cognitive empathy

If you do nothing else, zoom in on the “reactance “section which I titled this post for — that feeling of “F you I won’t do what you tell me” is ingrained and worth understanding.

If you know the reference, you know RATM. And just in case you’ve never seen it — the video below is a recording of one of their first public concerts. It was filmed in 1991 at Cal State Northridge. It’s a bizarre scene juxtaposing a routine day on a sunny campus quad against the band’s angry energy. An ice cream social with an a cappella group like Chorus against The Chaos would have drawn a crowd faster.

Zach is unfazed. By the end of Bullet In Your Head, the audience starts noticing. If you consider the state of rock just coming out of the 80s (Nevermind was released only 3 months before this performance) and the relative infancy of hip-hop this performance must have been pretty alien.

They would go on to release their debut album a year later and play a side stage at the second Lollapalooza.

They’d play the main stage one year after that.

[Unclassified personal thought: I like watching old concert videos. I’d waste one of my 3 genie wishes to have the power to peer into the present of the audience members I see in these old clips. It’s an escapable thought every time I watch them. Like knowing that skinny, shirtless viper with the long hair slithering to the groove is now bitchin’ about Blackrock makin’ his truck expensive to fill up. Mind you he’s a landlord in Laguna where he bought his first bungalow in 1972. Discovered the town after catching the Dead at the Newport Pop Festival a couple miles down the road a few years before that. A show he hitchhiked to from Indiana while running from the life the ”squares” back home had envisioned for him.

The brightness of youth casts a shadow — the finer rays suggest their own sorrows]

Money Angle

Last Wednesday in Investing With Your Hands On The WheelI beat my old drum that trading isn’t really something one does “on the side”. Trading is a business. And I am quite skeptical about the reward per unit of effort for playing Nostradamus in your investing portfolio. I know there are people who disagree with me on this. I’ll happily grant them their track records at face value but wave the plane with zits at them:

via Wikipedia

The quote:

I’m pretty much in the camp of “get a job where you can do this full-time if you really want to”. If you can’t do this but still want to explore strategies, then fence out some capital to play/learn/experiment…

For the rest of your assets stick with some kind of permanent portfolio implementation depending on your risk tolerance. You can follow folks like Corey Hoffstein, NomadicSamuel, Jason Buck, Lily for that stuff. InvestResolve guys too. All these tweet about it too and it’s all quite solid. I recommend this series by the InvestResolve team.

My gut feel is return-stacking/permanent portfolio for long-term DCA is probably the efficient frontier of work/return/risk triple axis.

If you insist on being active, there is a totally acceptable framing too:

But there’s no doubt that many people want to put their hands on the wheel and that has innate personal value (and that’s true whether it’s misguided or not). So in short I think it’s a tree:

  1. DCA permanent portfolio variant if you want autopilot
  2. If you want to put your hands on the wheel what does that efficient frontier of effort/return/risk look like where return also includes some illegible component of DIY satisfaction?

I should probably pull together a new Moontower wiki of permanent portfolio content that I like. It might be an insurance policy against me never writing the Implementation portion of

[I have all the material that goes into it collected and sorted but it’s a small book-level project that’s on the back burner]

In the meantime, I’ll dribble out some things that really resonated in this column. Today, I’ll point you more closely to the InvestResolve series I referenced in the above quote.

Adam Butler and his team at InvestResolve did a wonderful 12-episode Masterclass on the topic of portfolio construction.

  • I took notes on the first 8 episodes. I didn’t take notes for episodes 9-12 as they get into the weeds of quant methods, backtesting, and ensembles. I was more interested in a conceptual primer to risk parity as a portfolio construction method for diversifying across unique edges.
  • The notes include a link to the episode as well as a transcript

💡Most important ideas

  1. A more diverse portfolio has a higher expected risk-adjusted performance over time.
  1. Asset allocation is useful because it maximizes the number of independent bets in the portfolio.
  1. Those bets are independent are sustainable because they’re directly linked to fundamental economic properties.
  1. A risk parity portfolio is the most efficient portfolio if you believe major asset classes are fairly priced (ie their Sharpe or other measures of risk/reward are the same)

🔗InvestResolve Masterclass On Risk Parity (Link)

If you are short on time focus on the first 3:

Money Angle For Masochists

I saw a tweet:

Let’s set aside the obvious “just short bonds” response to a crystal ball that tells you mortgage rates are going to roof. While I’m not sure how volatile the 10-year note/MBS basis is, just shorting bonds would seem like the most direct and reliable trade.

The rest of the crystal ball portfolio underwhelms expectations. Ahh, a recurring parable in the “trading is hard” bible. Like if you knew what a stock’s earnings were going to be would you be able to make money? How do you know what the “whisper” number is or if the market is focused on guidance more than income for this quarter?

It also reminded me of 2 adjacent reads that cut to the heart of “how would you trade if you knew the future but not the path?”

  1. In Financial Hacking, a puzzle is presented:Assuming you could not trade options, how much would you pay to know the closing price of SP500 in one month?

    🧩Excerpts from the discussion

  2. Even God Would Get Fired As An Active Investor (AlphaArchitect)

Alexis reminded me of cringe times from my NYC days. Almost as cringe as referring to probabilities as deltas. As in “I’m 75 delta to meet you for drinks after my work dinner” 🤮

Enable 3rd party cookies or use another browser

Also, if you were never cringe about anything you have the heart of a dead fish and you should get that checked out.


it’s not “banking” per se but… I mean, it’s all “banking,” really……. right? 🥴 🎥 edited by @Alex Moudgil #finance #comedy #dating

♬ original sound – Alexis Gay

Moontower #197

Just one link before we hop into investing topics.

For his 100th essay in his series “We’re Gonna Get Those Bastards”, Jared Dillian tackles the question:

How do you live a happy life?

It’s short and sweet.

Money Angle

Top of the Food Chain

There are lots of videos online of orca pods feasting on white sharks. What rattles the imagination is how they go straight for the liver. The liver’s bounty is a dense nutrient-rich oil called squalene that can account for up to a third of a shark’s weight.

Hopping over the semantic curiosity that benz and squal just adopt an “ene” to become oil words, I’ll skip straight to ruthless analogy. The pod shops in investing are top of the food chain in asset management. It’s said on the internet, so I know it’s true, that a single shark liver can nourish an orca for a “whole day”. First of all, if that’s supposed to be a jaw-dropping amount of nutrition call me underwhelmed. If a white shark a day keeps the doctor away, I’m left to think Shamu’s cursed appetite has no end — this is an aqua-treadmill of blood without a killswitch.

Which serves the analogy perfectly.

Squalene is alpha. There’s not a ton of it out there and the hunt for it mobilizes the top of the academic food chain. In 2000, I made $50k including signing and year-end bonus my first year out of college. That figure is 8x today for top grads accepting prop shop offers. Talent war.

The trading world’s ruthless focus on squalene — risk-adjusted returns while staying market-neutral to print money in any environment has been adopted by the investing world. And the allocators have noticed. The pods, like the orcas, are eating everyone’s lunch right out of their bellies. And those inflows are arming the war for mature talent too. Giant guarantees to proven managers. The kind of money that can get even the most ambitious manager to re-think starting their own firm.

With that intro, I’ll point you to a podcast:

Patrick O’Shaughnessy interviews Will England (Invest Like The Best)

Will is the CEO/CIO of Walleye’s $5B multi-manager hedge fund. I’m familiar with Walleye because they started in the mid-aughts as an option market maker. Several friends and ex-colleagues have traded for them. But this podcast is about their hedge fund, not the prop biz. It’s the best investing interview I’ve heard this year.

First of all, if you are unfamiliar with the multi-manager or “pod shop” pass-thru hedge fund model then this interview is a great primer. The big 4 managers in the space are Citadel, Balyasny, Millenium and Point 72.

Will’s language, tone, and thinking will be deeply familiar to folks who have done tours of duty at prop trading and option firms. My take on this interview is “damn, that was honest”. Will is in Minnesota but shoots as straight as a Chicago pit trader. Heck, he addressed the alignment issues with the “back book” — I’ve talked to pod traders about this idea before and couldn’t believe he broached the topic in this call). His voice was like a lullaby from my younger years.

Patrick asks the right questions. Everything from the knowledge to the story is worth an hour of your time. It confirmed a lot of what I thought I knew and taught me even more.

A few thoughts of my own

Will says 25% of their business is still options trading but a significant chunk is now fundamental equity. The PMs are trying to earn a 3% spread between longs and shorts after stripping away beta and factor tilts. Just like other pod shops, these guys are farming pure alpha or “idio” (for idiosyncratic) and levering it to get to about a 30% return which the investor hopes to see half of after implicit/explicit fees.

It has always struck me that this is the natural progression of active management. A barbell where you pay up for pure alpha and get your beta for free.

The closet beta active management world is a melting ice cube. But the incentives and stickiness of legacy relationships both from allocators and story-telling managers will try to keep the freezer door closed as long as possible.

But I can’t say I know where the equilibrium will shake out. If you have pure alpha, you can choose your investors either by fees or by preference. You have all the bargaining power. But I’m not sure what the capacity of alpha even is. Will didn’t mince words about the competitiveness. He thinks the number of PMs that possess both the chops and psychological profile to play this game is on the order of a thousand people maybe. The pods are flush with cash and signing talent with big upfront deals like athletes. (He admit the model could be in a period of froth at the moment). Will’s belief in market efficiency sounds like “efficiently efficient”. Yes, there are 10 Sharpe strategies. They are also low-capacity. Any strategy with an obnoxiously high Sharpes is basically arbitrage counting down to extinction. But that new species pop up and then disappear is a general truism. A never-ending game of whack-a-mole.

[Aside: Anyone reading Moontower for a long time knows I don’t wade into the market-efficiency debates because they sound like academic masturbation. I have my own version which rhymes with what Will talks about — The “No Easy Trades” PrincipleWhen I encounter someone who disagrees with this I hear one of these possible confessions:

  1. “I got rich on a highly concentrated risky bet and have never considered what the outcomes would be if I re-ran my life 100x”
  2. “I have no idea what I’m talking about”

I was out with a friend recently who ran a high-volume options trading business for 25 years. We talked about how nearly every time they would “exploit” some weird rev/con financing opportunity they found a way to get f’d by the borrow market. He could rattle off example after example of interesting set-ups and yet the outcomes were consistent. You’re literally paying to discover new failure modes but the way each setup arrives you feel like you can see why the opportunities are real.

Almost every time I did a trade and felt good about it afterward, I was in the pre-glow of a bad beat. The trades that feel scary are the ones that pay. And this makes sense — the price is compensation for doing what nobody wants to do. The job-to-be-done is finding a way to manage the risk until everyone who is transacting to satisfy their greed or pain is filled. The removal of that pressure is what begins to turn the trade in your favor.

Trading profitably is painful. It must be or there is no reason to be paid for it. what’s worse — just because you feel pain, doesn’t mean you will make money. The pain is the cherry on top of doing everything right. You can have pain even if you do things wrong and it will be in vain. The difference is when you do things wrong, you feel good about it in the interim because you don’t get how this works. And that fleeting satisfaction is what keeps you from learning.

I’m sorry but trading profitably means being constantly paranoid and finding a way to live with that. I suspect a subtle aspect of what makes the pods so smart is they have codified and automated the risk management in a way that guarantees the PM’s paranoia.

This is an aside because I think you need a lot of reps to grok what I’m saying and honestly most people will just go on pointing to things that don’t make sense and breathlessly exclaim “See the market is inefficient”. You don’t have a right to say that unless you tweet it from your yacht purchased with lots of receipts.

Strategically, in a game where the skill level is extremely high and evenly matched, then variance will drive a lot of the separation. So the counterintuitive response for someone dead-set on being rich but knows they are overmatched is to take a giant, high-variance bet and hope this was the lifetime it panned out.]

Sorry, back to the body.

In short, I don’t consider what these pods are doing to be investing. They are trading but on a medium time horizon. It’s called “fundamental equity” but let’s say the holding periods are under 2 years and probably more like 1 (if someone knows the stats please share) then this isn’t about “realized” fundamentals. This is about anticipating change in sentiment around expected fundamentals. This feels like a game of nearer-term info, flows, positioning, and game theory. A re-rating gameA game that was much more similar to what I did (although it sounds more complex than vol trading which has more to do with flows and is yet even smaller capacity) than what I imagine value investors do.

My thoughts on value investing are mixed. And I’m being liberal with the word “value”, recognizing that cookie-cutter implementations of “value” are the equivalent of accounting fails (like not updating the meta-principles to handle object-level changes in importance to things like goodwill or brand equity). I assume there are value managers who can spot high-multiple value names because they have a “g” column in their Pandas dataframe (just kidding — I meant in their spreadsheet — we are still talking about value investors here). The problem with these managers and their “long-term” theses is they want you to buy the brand name vitamin instead of the generic and when you ask for the quarterly bloodwork to see if it’s making a difference they say you won’t see the benefits until you retire. The blood results are just “noise” they’ll tell you.

On the other hand, if the manager’s signal reliably swamped the noise then they wouldn’t give that away. They’d try to get pod shop fees. Market efficiency is fractal — there’s a market for the assets and for the labor that moves the assets. I’ve alluded to this before in The Paradox of Provable Alpha and Will’s interview made me think it’s only going to be a more relevant paradox going forward.

Learn more:


This is a long but good thread by @FundamentEdge

This pairs well with Ted Seides’ interview with Jason Daniel and Porter Collins, 2 of the investors made famous in The Big Short from their work with Steve Eisman:

🎙️Big Shorts and Big Longs (Capital Allocators)

These guys had a stint at Citadel where they learned the intricacies of the pod model. It didn’t resonate with them and for reasons that confirm my own interpretation — pods are more like traders than long-term investors. They had 2 big insights:

  1. The pod model is so prevalent (and it is smart) that if you don’t understand the dynamics they impose on the market, you’re playing with one eye closed. They have respect for the model (and how Citadel implemented it) even if it’s not their game.
  2. They realized the model left some forms of edge behind because of its nature. They could make picking that up part of their own niche. This is touched upon in Caughran’s thread above.


🔗Multi-Manager/Pod/Hedge Fund 101 (7 min read)

Byrne Hobart’s primer from his evergreen Capital Gains Substack


Money Angle For Masochists

I published a big post this week. Big enough that it warranted a map. You will get technical knowledge, some trading bits, and ideas that are worth assimilating into how you think about investing. In fact, you’ll even see opportunities that arise because of the different lenses investors and traders bring to markets.

The map:

Outline of the Risk Neutral Probability Lessons (Moontower)

And if you want to jump right in:

Understanding Risk-Neutral Probability (Moontower)

The post was the culmination of connecting lots of dots. I started thinking about it after watching a short YouTube clip on my flight to Vietnam back in March. I hope you enjoy it. I’m biased but think the points are underappreciated (or at least that’s how I justify the 30-40 hours I put into it).

A nice affirmation

I hadn’t looked at my website analytics in a while (it’s a bit more annoying to do so since a lot of the posts I wrote this year are these longer technical ones that I host on Notion).

When I logged in for a gander I found that several trading and brokerage firms are linking my material through their internal wikis or intranets. When I write these posts, I often see them as a useful aide for a senior trader who doesn’t feel like explaining some concept to a trainee. “Ahh, there’s some stoner blog called Moontower that wrote about this, just search for it on there”.

Anyway, it’s a nice affirmation. I probably won’t be thrilled when the LLMs are quoting me but ya know, it’s America — corporations are people, computers are people. Maybe only people aren’t people.

Moontower #196


I’m just writing from the hip today about reading.

Since  my first kid was born my reading has cratered to like 3 books a year. While Zak is a convenient scapegoat, the truth is moving to CA is the true culprit. I no longer had that 45-minute E-train commute from Long Island City to the NYMEX. That trenta-sized ice coffee with a paperback was a luxurious start to the morning before switching into literal arena mode (shout out to the main character of fintwit this week).

Zak is 10 and I’m emerging from the fog. I’m on my 12th book this year, participating in my first ever book club and likely joining another. The Kindle app has also helped — the phone is morphing from a pile of Instagram wedged between slices of group chats into a book sandwich (separate thought, but a great use of LLM tech would be to classify a text message into time-sensitive or not and only send notifications for the former).

This year I’ve read:

I’m currently reading 3 books simultaneously:

  • Tomorrow, Tomorrow, Tomorrow

    This is for the book club. I’m really enjoying this novel.

  • More Than A Number’s Game: A Brief History of AccountingThe book traverses history by examining a different case study per chapter. I’m early in the book, but so far it’s full of highlights.

    Why am I reading this?

    Broadly speaking — accounting, from GAAP to mental accounting, is a striking topic because in the spirit of “we manaage what we measure”, it is the seat of so much decision-making extending to everything. Hell, business accounting is just a narrow application of measurement at large which properly done should consider counterfactuals, opportunity costs, and at least second derivatives.

    The simplest non-obvious questions are like: Do Uber drivers deduct their car’s depreciation from their hourly wage (I see you Jim)? How many businesses actually suck once you properly adjust for maintenance capex or what Buffett calls “owner’s earnings”?

    And much more complicated questions wrangle with — just how much greener is an electric vehicle than a fossil-fuel vehicle (suspect it has a lot to do with where these vehicles are located so you get the non-sound-byte-friendly answer: “it depends”).

    Another thought: While my interest in Georgism was sparked by normative concerns, the most interesting part of it comes from its accounting — specifically the philosophical basis for distinguishing land and other natural resources from capital. It’s an amazing reminder that the connotations of big words like “capitalism” are loaded with design choices in how we do accounting and none of it is a natural law like gravity. Economic policy is not physics. How we understand it is tightly and invisibly wound around our basic accounting definitions.

    (There is nothing about capitalism which suggests that we should account for the land and sky differently, but we do. Which implies that how we treat land is not resting on the principles of capitalism. Which strongly suggests that painting changes in land accounting as anti-capitalist is a self-interested sleight of hand. The Georgist approach actually strikes me as far more in the spirit of capitalism. I sense plenty of room for thoughtful counterpoints but the average reaction to Georgist principles are just the confessions of people habituated to regurgitating convenient viewpoints. And that’s me trying to be nice.)

    If you care to appreciate what this means, it’s best to observe the building of an economic framework from first principles. Give it a try.

    Go to: and rip thru the following sections:

    📒Defining Terms

    👷🏾‍♂️Wages, Capital, and Labor
    🔀The Laws of Distribution

  • Life in Half A Second by Matthew Michalewicz

    Matthew is a Moontower reader and sent me a signed copy. It’s self-help kind of book which is a style of book you have to force me to read. I actually don’t relate to a lot of the thinking but I definitely glimpse some bridges to my own. And this is helping me flesh out some thoughts that will make it into Moontower I’m sure. Plus, being able to discuss it with the author is pretty dope. We see eye-to-eye on a lot about life so by exploring the parts I struggle to relate to should stimulate a wider perspective.

Books I’m reading aloud with my kids (as I risk afflicting them with the “read several books at once” disease)

  • Journey To The Center of the EarthThis is not an easy read, so it’s a great opportunity to see what they understand and act as translator. I’m playing with this idea of having them read books at their level on their own, but I read harder books with them. I have a little story made up about how this gives them different “powers” because I think creating some magic or mystique about the beauty of reading will give them an inexpensive pleasure and sense of appreciation throughout their lives which also happens to have instrumental value.
  • Man For All Markets: Biography of Ed ThorpEd and his life are wildly inspirational. He became wildly successful (wealth, family, friends, health) because he was super-curious, playful, independent-minded, and persistent. Money was a byproduct, not something to optimize for. Nearly all the people I find inspirational fit this mold. Money is great and I definitely want more, but never at the expense of boring myself.

    The unrelatable part of Ed’s story is he is one of the towering geniuses of the 20th century.

  • Hitchhiker’s Guide To The GalaxyI’m early into this and been meaning to read it for awhile. So far so good. Literal LOL material.
  • A Wrinkle In TimeThis has been a slog to be honest. Not sure we’ll finish it, haven’t touched it all summer.

What books are next

These aren’t in order. I impulsively pick in the moment. Fiction books will come from the book clubs so they are TBD.

  • A Theory of Fun for Game Design by Raph Koster
  • Alchemy by Rory Sutherland
  • World For Sale: Money, Power, and the Traders Who Barter the Earth’s Resources
  • Cash Rules by David Hale
  • Dreamland: The True Tale of America’s Opiate Epidemic
  • Dopamine Nation
  • Chaos by Tom O’Neill
  • Killers of The Flower Moon
  • Guitar Zero (re-read)
  • Play Anything: The Pleasure of Limits, the Uses of Boredom, and the Secret of Games

Technical books

  • Advanced Portfolio Management: A Quant’s Guide for Fundamental Investors (I believe this is standard-issue at Citadel)In the spirit of holistic accounting, I’m interested in pertinent benchmarking and proper performance attribution. This book should help.
  • Systematic Trading by Rob Carver
  • Positional Trading by Euan Sinclair
  • Active Portfolio Management by Grinold & Kahn
  • I’m also reading a highly technical manual on derivatives that is formal while covering practical minutiae from the trenches — many that are rarely or never addressed in the canonical texts. This one is not yet (and may never be) published — written by ex-SIG friend, currently in a senior role at a large MM. I keep urging the author to publish because I selfishly want to cite from it.

Money Angle

Myself and a few members of our local club are going to do a financial and investing literacy series for the member families. We put together a first draft syllabus this week and as things move along I’ll share here. Perhaps we’ll even turn into an online series. I’ve been working on one focused on the investing side but it’s only a WIP because of priorities (

The one we are doing for the club will be highly practical drawing on the experience of a financial advisor, a retired Point 72 PM, and some option trader crank who writes on the internet. (Topics will range from “what is a bond” to bringing in experts to talk about how to pay for college)

As I was poking around notes, I re-read some of Byrne Hobart’s Capital Gains missives which is a series devoted to finance education (although the material isn’t quite 101 — it’s more of a redo of 101 for people who have already gotten a finance education. I hope Byrne doesn’t mind me saying that.)

Here’s one that stood out:

The Capital Asset Pricing Model: Risk, Reward, and Reasons (Capital Gains)

Some excerpts/teases:

The temptation is to think that if risk and reward are correlated—if you can reach for higher returns by selling your investment-grade bonds and replacing them with stocks, or selling your large-cap US stocks and replacing those with wilder emerging market stocks—that all forms of risk-taking are rewarded with higher returns. But this isn’t true: the expected return of a single stock of average volatility is the same as the expected return of the market, but the volatility of one stock, compared to a diversified portfolio, is much higher. And thanks to the relentless math of “volatility drag,” i.e. the observation that you don’t offset a -50% loss until you’ve made a +100% return, the expected overall outcome from this particular form of risk-taking is negative.

And there are other forms of unfavorable risk/reward tradeoffs: paying higher fees for exposure to the same asset class, for example, is a straightforward cut to returns with no attendant reduction in risk. In the general risk/reward tradeoff, there are some extreme cases where things don’t work as planned: the longer-term a bond is, the more it’s a bet on interest rates, and the more it’s excess return is compensation for taking interest rate risk. But 30-year bonds don’t get returns quite commensurate with their risk—because when bond portfolio managers want to make a big bet on rates, that’s what they have to bet on.

How can we square these observations with the fact that many investors have achieved great success through concentrated bets on a handful of positions? One obvious answer is that some of them are lucky; “lottery ticket” is an accurate pejorative term for assets and strategies whose risk isn’t commensurate with reward, but lottery winners do exist.

However, there’s a subtler answer…

There are many mediocre tradeoffs between risk and reward, where you can get the same mix of them in different amounts. And there are some bad tradeoffs available, with incremental-reward-free risk. To get a good tradeoff, you need a good reason to expect it: some justified belief that there’s a particular asset that’s mispriced, and a good meta reason to think that nobody else has considered it. In a competitive market, you need not just a theory about the asset in question, but at least some kind of theory of why your competitors haven’t spotted it. Yes, “I’m a better investor than they are” is a theory—but do any of your competitors pick stocks despite consciously thinking they’re bad at it? Especially in an environment where cheap index funds are available, you should assume that the average market participant is about as self-confident as you are. And one fun implication of this is that the best returns accrue to people who think they’re less skilled than the average stock picker, but skilled enough that they shouldn’t leave the whole process up to Standard & Poors.

Which is not to say that investing by picking a small set of smallish, high-variance companies, watching them like a hawk, and enjoying long-term outperformance with some painful dips is a bad trade. It can be a very rewarding hobby! But the opportunity cost is defined by the average performance of index investing. So stock picking ends up being like many other hobbies: it takes time and effort, and if you’re very good at it and somewhat lucky, you might break even.

Money Angle For Masochists

The new post Short Where She Lands, Long Where She Ain’t was incredibly well-received this week so I’m hopeful it’s doing what I intended — prompting investors to match their trade expressions with what they actually think the future outcomes look like. Sometimes you use a mallet (“just buy the stock”) and sometimes your view demands a scalpel (“if the stock is not higher then it’s much much lower”) and that is the realm of options.

Here’s a re-print of the insights and answers to questions I anticipated:

🔭High-level insights

  1. You want the stock to land near your short strike or away from your long strike. Over a large sample of trades, if the stock expires near your long strike more often than the theoretical distribution then you will lose. If it lands there less often than theoretical, you’ll win on average. For short options, the opposite is true. Even though the options in these sims are perfectly priced, there is still noise because we are still drawing a sample.
  1. Put-call parity is iron-clad. You are either long options or short options. These sims let you see that whether you delta hedge a call or put the outcome distribution is the same. All that matters is whether you are long or short an option, not the type! [My professional risk software didn’t even display calls vs puts at the high level. It just summed total options per strike. You could drill down to see if your exposure was calls vs puts because it mattered for funding and pin risk reasons.]
  1. “Pay me $10k up front and I’ll flip a million-dollar coin with you” That’s options market-making in one line. Remember these sims are perfectly priced options. Now imagine you have a trading business and net a penny of option per trade (this is a very generous assumption — margins are often smaller than this). In the example of the 110-call with 8-steps until expiry you’d be making a penny of edge with a standard deviation of 88 cents! Of course the Sharpe ratio at the trade level isn’t the same as the Sharpe ratio at the strategy level. Because edge scales by N and risk scales by square root(N) you can have a great business if you do LOTS of trades while maintaining that edge. The flip side: if you don’t do lots of trades your results are noise. Welcome to epistemological nihilism.


If you are not a delta-hedger, but trading the options outright for direction does this matter?

Sure does. If you buy a call because you’re bullish, your alternative could have easily been to buy the equivalent delta worth of stock. If the stock then goes to your long strike, you lost not only your premium but the foregone return on the shares you would have owned! This reinforces the point that options require you to be right on direction and timing/volatility (time and volatility are intricately linked). Remember, options are priced for specificity. The leverage is amazing if you call the outcome and timing correctly, but like a parlay, you will often lose if you get any part of the bet wrong. Remember the put-call parity insight — no matter what you do, you are trading volatility. Without a view on that, you shouldn’t touch the options. If this doesn’t make sense, you don’t understand options. The house is more than happy to have you delude yourself in the noise I described above.

You are a market-maker and see a giant flurry of call buying in the context of bullish news. You decide the buyers are overpaying — the prices are implying a volatility your process has deemed as “excessive”. Do you hope the call buyers are right?

As a market maker, you try to understand your counterparties. The prices people are paying (which imply a volatility) and strikes they are chasing give you a sense of how much conviction and how far they think the stock can run. If you suspect they are bidding “too much” for these calls you will sell them and you will buy the stock yourself to hedge the calls. What am I rooting for and what am I worried about? Let’s start with my 2 primary fears:

  • The stock acts like GME and just explodes higher. No vol that I sell is high enough. It rips thru my short strike, it keeps going, it’s hard to buy, gamma squeeze, you know the drill. That’s the obvious risk.
  • The stock gaps down through a trap door. No liquidity. I collect the option premium but I ride my long shares into the grave.

What am I rooting for? The stock continues to go higher, but slowly. The call owners feel the theta breathing down their necks and are anxious to monetize. They got the trade thesis right but…they overpayed for the options. The market makers have them just where they want them. If they are aggressive, they will understand that there is a supply of calls being held by weak (as opposed to diamond) hands and start offering the volatility down themselves, accelerating the losses felt by the option longs. It’s a game of chicken and the first option owner that offers is the tell. They’re going to throw in the towel. As the market maker this is fun. I win on my long shares and I will get to cover my vol shorts hopefully at cheap levels. The way I think about trades where the counterparty is using the options for direction is whether their being correct on direction is stabilizing or destabilizing. In 2021, GME going up further was highly destabilizing. It didn’t make sense. It was “irrational”, “forced squeeze”, etc. A destabilizing move is a liquidity vacuum. Once something doesn’t make sense, there is a phase shift in sentiment from logical thought to the next print is going to be driven by the most desperate account. Death spirals are divergent, not mean-reverting processes.

On the other hand, a stabilizing move is one that occurs in the direction of consensus and makes sense. Think early 2022. Hedge funds had actually degrossed ahead of the sell-off and option skew notoriously underperformed going from expensive to multi-year lows during the sell-off. Fund managers were well positioned for the sell-off. Here’s Financial Times quoting Benn Eifert…

Option manager called the sell-off the most telegraphed:

There are always some people caught unawares, but the central bank pivot from “it’s transitory” to “we’re going to nuke inflation” was petty well-telegraphed, and the impact widely expected.

My discretionary sense of whether a move is stabilizing or destabilizing plays a large role in how I manage an option position for the name. That sense comes from the semi-conscious process of pattern-matching how the market is positioning, how aggressively and what the broader news context is. I’ll add one bit.

If I have a sizeable short call position, my experience tells me that I should be nervous about the downside. If the market is smart (and it is), it will bid for calls when it understands that the distribution has a more positive skew. The counterbalance to a more positively skewed distribution is that the underlying is more likely to go down in priceAnd if the options are bid because the market understands the distribution then that is usually how I’m going to get hurt. Owning long deltas on a sharp down move. And here’s the salt in the wound:

When I sold the expensive calls I likely bought some other option to hedge the vega. If the skew shifts to the calls, that means I probably own puts which would have begun to screen cheaply. The problem with this is the down move is expected and stabilizing. which means the implied volatility will fall.

This is diabolical.

The stock is going away from my short calls, towards my long puts and I’m carrying long deltas against both types of options. Pain parade.

I have seen traders blow out in these scenarios. Long vol and getting longer vol as a name collapses on a stabilizing move. And every time that vol compresses on a downtick, this position “decays longer” (vanna for the nerds out there).

If you take anything away from this — your assessment for how vol will react is heavily dependent on how far and fast a move can be before it phase shifts from stabilizing to destabilizing or vice versa.

[Whisper voice] The kinks in the skew are a clue which means the right way to iron them out is with a butterfly not a vertical spread. Unless you haven’t been trading options for years, that will mean nothing to you and it also means you are doing life correctly. Take a bow.

How can I use this knowledge to shape trade expressions?

If you’re bearish, consider buying calls to replace part of your long position. If the market falls and they expire worthless, you are happy.

You can then scoop hard deltas at the lower price.

In other words, you were bearish which is highly correlated with the idea that volatility is going to increase. Remember you want to own options where the stock ain’t going. Think of a very expensive 2021 type market — if the expensive stock keeps going up it’s a surprise. It’s destablizing. So the calls will hold up well.

But if the market does tank, you’ll be happy you switched your long shares (or what I call “hard deltas”) to calls (ie “soft deltas”)

You want your hard deltas pointing in the direction of the most likely scenario and your options pointing in the direction of the destabilizing scenario that probably isn’t going to happen.

This thread harps on this a bit more.

I have a hunch my boss doesn’t really understand options but he trades them a lot. Is there a way to tell?

Does he like to say “I’m selling this strike because it’ll never get there”?

That’s a dead giveaway that he’s trading options without understanding their nature. This misunderstanding leads to decisions that are 180 degrees opposite from their thesis.

Why? conditional probability — a cheap option that hits is nitroglycerine because the cheapness signified that its the seller used “it’ll never get their logic”. Their false confidence in that assertion means they underestimated the scenario when sizing their risk. The move is deeply destabilizing because they are offsides in a big way and need to cover.

A short-circuit in Bayesian reasoning displays itself when put-sellers say “I’ll be happy to buy the stock if it gets there”. They are projecting a state of the world where only this one asset changed in price and everything else stayed the same. Or the investor who sold bond puts assuring us they’d “be happy to buy bonds if they hit a 7% yield.”

Well, what if they only hit a 7% yield when inflation is 9%?

I’ll be repetitive — this boss is the same guy who sells calls because he’s bearish.

Bro, you don’t want to be short options away from where you think the stock is going — you want to use hard deltas to point that way and own that option as insurance to put the trade on with conviction.

☮️Stay groovy!

Moontower #195


This past Thursday at Back To School Night, I’m sitting in my 5th grader’s classroom chair scribbling a note on his dry-erase desk for him to see in morning. His mother is filling out a parent survey that helps the teacher get up to speed on your kid. It looks like she’s finished when she slides it over to me to answer a question she left blank — “What would you like your child to focus on this year?”

An article I read this summer immediately popped into my mind — The State of Being Stuck by math educator Ben Orlin.

The article begins:

Last year, I got the high school math teacher’s version of a wish on a magic lamp: a chance to ask a question of the world’s most famous mathematician.

Andrew Wiles gained his fame by solving a nearly 400-year-old problem: Fermat’s Last Theorem. The same puzzle had captivated Wiles as a child and inspired him to pursue mathematics. His solution touched off a mathematical craze in a culture where “mathematical craze” is an oxymoron. Wiles found himself the subject of books, radio programs, TV documentaries—the biggest mathematical celebrity of the last half-century.

Ben, like me staring at that survey question, didn’t want to waste the opportunity. He wondered…


…before settling on this question:


Here’s what Ben got back:

The essence of Wiles’ answer can be boiled down to just six words: “Accepting the state of being stuck.”

For Wiles, this is more than just a vague moral, an offhand suggestion. It’s the essence of his work. It’s an experience at once excruciating, joyful, and utterly unavoidable. And it’s something desperately misunderstood by the public.

“Accepting the state of being stuck”: that’s the keystone in the archway of mathematics. Without it, we’re left with nothing but a pile of fallen bricks.

Wiles began his answer, like any good mathematician, with a premise everyone can accept: “Many people have been put off mathematics,” he said. “They’ve had some adverse experience.”

It’s hard to argue with that.

“But what you find with children,” he continued, “is that they really enjoy it.”

In my experience, it’s true. Kids love games, puzzles, learning to count, playing with shapes, discovering patterns—in short, they love math.

So how does Wiles account for our alienation from mathematics, our loss of innocence?

“What you have to handle when you start doing mathematics as an older child or as an adult is accepting the state of being stuck,” Wiles said. “People don’t get used to that. They find it very stressful.”

He used another word, too: “afraid.” “Even people who are very good at mathematics sometimes find this hard to get used to. They feel they’re failing.”

But being stuck, Wiles said, isn’t failure. “It’s part of the process. It’s not something to be frightened of.”

Catch me and my teacher colleagues any afternoon, and—if you can get past the “sine” puns and fraction jokes—you’ll likely find us griping about precisely this phenomenon. Our students lack persistence. Give them a recipe, and they settle into monotonous productivity; give them an open-ended puzzle, and they panic.

Students want the Method, the panacea, the answer key. Accustomed to automaticity, they can’t accept being stuck.

“What I fight against most,” said Wiles, naming an unlikely enemy, “is the kind of message put out by—for example—the film Good Will Hunting.”

When it comes to math, Wiles said, people tend to believe “that there is something you’re born with, and either you have it or you don’t. But that’s not really the experience of mathematicians. We all find it difficult. It’s not that we’re any different from someone who struggles with maths problems in third grade…. We’re just prepared to handle that struggle on a much larger scale. We’ve built up resistance to those setbacks.”

If you have walked past a rack of popular non-fiction books in the past decade, you are thinking “not another lecture on grit or growth mindset please”. Ben doesn’t go there. In fact, he’s quick to affirm how we often overplay the “grit “ hand:

Recently, the currency of “grit” has fallen among teachers. It’s not that the idea lacks psychological validity. It’s more the weight of its educational connotations. Grit has become an excuse to romanticize poverty as “character-building.” It has devolved into a vague catch-all at best, and at its paradoxical worst, a reason to write kids off as lost causes.

Orlin proposes a 3rd idea:

Wiles is no educational theorist, of course, but I find that he offers a resonant and compelling third path. For him, perseverance is neither about personality (as with grit) nor belief (as with mindset).

Rather, it’s about emotion.

Fears and anxieties come to us all. You can be a nimble mathematician, a model of grit, and a fervent believer in the human potential for growth—but still, getting stuck on a math problem may leave you deflated and disheartened.

Wiles knows that the mathematician’s battle is emotional as much as intellectual. You need to quiet your fear, harness your joy, and cope effectively with the doubt we all feel when stuck on a problem.

Giles offers some counterintuitive ideas as well:

On the value of forgetfulness

“I think it’s bad to have too good a memory if you want to be a mathematician,” Wiles said. “You need to forget the way you approached [the problem] the previous time.”

It goes like this. You try one strategy on a problem. It fails. You retreat, dispirited. Later, having forgotten your bitter defeat, you try the same strategy again. Perhaps the process repeats. But eventually—again, thanks to your forgetfulness—you commit a slight error, a tiny deviation from the path you’ve tried several times. And suddenly, you succeed.

Wiles has a nifty analogy for this: it’s like a chance mutation in a strand of DNA that yields surprising evolutionary success.

“If you remember all the false, failed attempts before,” said Wiles, “you wouldn’t try. But because I have a slightly bad memory, I’ll try essentially the same thing again, and then I’ll realize I was just missing this one little thing.”

Wiles’ forgetfulness is a shield against discouragement. It neutralizes the emotions that would push him away from productive work.

Coming back to the parent survey…how did I reply?

I want Zak to build the muscle of persisting through drawn-out problems.

This skill is more valuable in a holistic, psychological sense than just being a technique. It’s hard to feel truly empowered unless you become familiar with the pattern of feeling stuck and the emotional reward of chipping your way out of it. If you find success too quickly, you’ll fear that you can’t repeat it. You’ll feel like an imposter. You’ll be imbalanced — with a bias towards protection, not growth. Coddling your ego or hating on others when you should be prepping for your next climb from a new valley.

Money Angle

I had a little financial adventure this week that’ll I’ll try to connect to some broader concepts in the Masochism section.

My wife’s sister’s family lives next door. We removed part of the fence so we have our own little commune with 3 generations living together. It has been the largest life upgrade I can think of.

The catch: it’s temporary — both families are renting.

We aren’t actively looking for a house to buy, but we asked our friend whose also the realtor who sold our house for us to just keep an eye out for “situations that could accommodate both our families”.

We got a call this week. She has a client selling a house that hasn’t been on the market for 50 years. An old 3/2 near the elementary school on half an acre. Oh yeah, and they are also selling the completely undeveloped flat half-acre lot behind them (there’s an easement making this back parcel a “flag lot”).

By offering the lots separately they are able to draw a wider buyer pool. But also makes the deal hairy. If you just want the front lot, you will be reserved in your bidding because you know at some point there’s going to be a house built in your backyard. Who wants to live next right next to a construction project for 2 years?

But this is also tricky for the person who buys just the vacant parcel. The 3 adjacent neighbors and the family who buys the lot with the house are going to NIMBY the permit and building process. Not to mention, that you need to pull utilities to the vacant lot (estimated to be about $150k).

The ideal buyer would want to lift both lots presumably with a plan to live in the old house while they build a new house. But that is a tiny buyer pool — population us.

We bid on both as a package. Because of the complications described earlier, the parcels aren’t selling immediately. We made a cash bid below the sum of where the legs are bid with the sense that the sellers know if they fill a single leg, it will be harder to fill the other and we were the clean option.

We would find out the next day if our bid was accepted.

I’ll bring you into the discussion of risk we had that night as we waited.

We believe our bid had a margin of safety of about 25% below fair value based on comps (comps for the vacant lot are higher variance and indirect — basically backing out land value from the price of teardowns and near teardowns). Building is a hairy proposition around here so even though you shouldn’t expect a builder’s margin, there is some margin which I describe as the market’s “Here’s a carrot, I dare you to upend your life to navigate the labyrinth of CA construction”.

We didn’t expect to get win the bid. Even though the bids for the individual lots were shakier because of the total dynamic, we were still bidding well below them. But what if we did?

I’d actually be concerned. Since the fair value of the lot with the house was easily-comped, getting hit would tell me the vacant lot had a landmine if it isn’t purchased by say, a direct neighbor (where we assume the individual lot bids came from). What if the direct neighbor was bidding for the lot because they just wanted more space (or a pool/tennis court, etc)? If we got hit perhaps it’s because the utilities are way more expensive to pull (I have a friend that owns a bunch of SFH’s in town and told me a story of how the water utility wanted $750k to feed a hillside parcel).

In short, if you bid below the sum of the legs and you get filled, you need to update your prior of what fair value is. We had a few knowledgeable friends including a local builder lined up to walk the property with us in the event that we get our bid hit. I was planning to be down at the permit office learning what I could this coming week, ready to ask the utilities about “worst case scenario quotes”, and primed to talk to insurance companies (Allstate and State Farm who make up the bulk of CA property insurers have stopped underwriting new policies in the state as of this summer— this is a whole other topic that gives me black swan vibes — well grey swan if I can see it guess). In short, we fired out a bid knowing we could back out risklessly. If we got filled it would be a highly restrained win until we investigated the risks more closely.

As expected our offer bid was not accepted.

Money Angle For Masochists

The meta-risks above exist wherever deals are made.

Adverse selection

There is a lot of money floating around the Bay Area, a shortage of supply, and multi-generational relationships that we are not insiders of(we’ve been here close to a decade only). Given our relationship with the broker and the hair on this deal, we felt some of that was mitigated but probably not all. After all, our limited knowledge of the neighbors is a soft underbelly in our reasoning.

The catchy name for this concept is the “market for lemons”. Its strongest form contends that all used cars are overpriced according to the logic here. As a matter of practice, I suggest using that heuristic as the default but seek to disprove it because there is always the possibility of an inefficiency in your specific situation. It would be worthwhile to consider what conditions would make your situation more or less likely to lend itself to adverse selection.

Whenever you compete for a deal you must understand where you stand in the pecking order, who else has seen the deal, and what their passing on it might be saying.

Winner’s Curse

Fair value is not what you think conditional on getting filled. In Ben Orlin’s book Math Games With Bad Drawingshe discusses the value of playing auction games:

Because everything has a price, and auction winners often overshoot it.

We live in a world on auction. Photographs have been auctioned for $5 million, watches for $25 million, cars for $50 million, and (thanks to the advent of non-fungible tokens) jpegs for $69 million. Google auctions off ads on search terms, the US government auctions off bands of the electromagnetic spectrum, and in 2017, a painting of Jesus crossing his fingers fetched $450 million at auction. Before we dub this the worst-ever use of half a billion dollars, remember two things: (1) The human race spent $528 million on tickets to The Boss Baby, and (2) it’s a notorious truth about auctions that the winner often overpays.

Why does this winner’s curse exist? After all, under the right conditions, we’re pretty sharp at estimation. Case in point: In the early history of statistics, 787 people at a county fair attempted to guess the weight of an ox. These were not oxen experts. They were not master weight guessers. They were ordinary, fair going folks. Yet somehow their average guess (1,207 pounds) came within 1% of the truth (1,198 pounds). Impressive stuff. Did you catch the key word, though? Average. Individual guesses landed all over the map, some wildly high, some absurdly low. It took aggregating the data into a single numerical average to reveal the wisdom of the crowd.

Now, when you bid at an auction — specifically, on an item desired for its exchange value not for sentimental or personal reasons — you are in effect estimating its value. So is every other bidder. Thus, the true value ought to fall pretty close to the average bid. Here’s the thing: Average bids don’t win. Items go to the highest bidder, at a price of $1 more than whatever the second highest bidder was willing to pay. The second-highest bidder probably overbid, just as the second-highest guesser probably overestimated the ox’s weight.

To be sure, not all winners are cursed. In many cases, your bid isn’t an estimate of an unknown value but a declaration of the item’s personal value to you. In that light, the winner is simply the one who values the item most highly. No curse there.

But other occasions come much closer to Caveat Emptor: The item has a single true value which no one knows precisely and everyone is trying to estimate.

I like an example from Recipe For Overpaying: investor Chris Schindler explains why high volatility assets exhibit lower forward returns: a large dispersion of opinion leads to overpaying. He points to private markets where you cannot short a company. The most optimistic opinion of a company’s prospects will set the price.

Getting filled in an auction should make you update fair value. In Laws of Trading, Agustin Lebron gives an example from the market-making context. He starts by echoing what we know about the winner’s curse — any bidding strategy requires the bidder to estimate the item’s fair value conditional on having won the auction. This requires estimating how many bidders and how wide their uncertainty is regarding the item. But the problem is that some bidders are better informed than others. So if you are relatively uninformed and win the auction you are sad. [This topic came to life constantly to anyone who came to the StockSlam sessions — Steiner generously joked that if you traded with the Kris bot, you track down the info that shows how you just got arbed.]

But Agustin then gives an example of how to Bayesian update:

You may interpret a market maker’s width as an expression of confidence and using that to update your fair value by weighting their mid-price by the confidence.

If I’m 54.10-54.30 and you are 53.50-53.90 then I’m 2x as confident. So my new fair value is 2/3 x 54.2 +1/3 x 53.70 = 54.03

My Bayesian analysis of being filled on a limit order vs market order

Imagine a 1 penny-wide bid/ask.

If you bid for a stock with a limit order your minimum loss is 1/2 the bid-ask spread. Frequently you have just lost half a cent as you only get filled when fair value ticks down by a penny (assuming the market maker needs 1/2 cent edge to trade). But if you are bidding, and super bearish news hits the tape (or god forbid your posting limit orders just before the FOMC or DOE announce economic or oil inventory), your buy might be bad by a dollar before you can read the headline.

If you lift an offer with an aggressive limit (don’t use market order which a computer translates at “fill me at any price” which is something no human has ever meant), then your maximum and most likely loss scenario is 1/2 the bid-ask spread.

Do you see the logical asymmetry conditional on being filled?

Know what you’re leaning on

When you are a market-maker and you get filled it’s because your bids and offers are conditional on other bids and offers in the market. My bid in XLE might be pegged to the market’s bid for OIH. This is known as “leaning on an order”. My model has some value for the spread and if I get filled, I’m presumably able to leg the spread at a price I’m happy with. If I didn’t think I could leg the spread, I’d adjust my bid for XLE.

In real life, I might bid for a house but there’s still some conditional peg in place. If the stock market suddenly dove on a surprise 75 bps rate hike, I’d pull my house bid. It’s stale. The world and my assessment of the house’s value has changed. The period that defines staleness differs depending on whether you deal in real estate or HFT but the concept persists.

[This actually happened to us when we were in contract to sell our TX property last year. I had to act pissed when the realtor said the buyer’s financial advisor suggested they pull the bid when the stock market nosedived in the spring, but secretly, I thought “good advisor”. He was very right. We ended up selling the house nearly 10% cheaper].

The key is to always keep the reasoning for the price you bid or offered fresh. If you lose sight of why the price you are bidding makes sense, then your decision is no longer linked to an auditable chain of logic where you can go out and test the assumption (ie for example if you tried selling some OIH you might find the bid isn’t real or unusually thin and therefore your XLE bid might be “propping up the market” and the OIH bid is just leaning on you — it just has a different assessment of the spread value between the 2 stocks). Once you lose the chain of logic, you’ve lost the grip on the kite. Your bids will just float capriciously in the winds of emotion, narrative, and behavioral biases.

I’ll leave it there.

☮️Stay groovy!

Moontower #194


Some recent convos had sex with lingering thoughts from a podcast on a bed of a blank page this morning and today’s Moontower is the weird baby that popped out.

I recently listened to my first episode of Dan Carlin’s Hardcore History — a tour of the transatlantic slave trade entitled: Human Resources. Dan’s story-telling and research shine in this nearly 6-hour episode. He deserves all the accolades he gets. The style, quality and nuance of his work are well-advertised, I’m just late to the party. He immediately jumped into my ring of favorite creators.

I’m also a fan of the Founder’s podcast. Because I found an interview with its host David Senra to be as compelling if not more than the books he highlights (a high bar), I decided to hunt down interviews with Carlin. The first one I clicked on with Lex Friedman did not disappoint.

Here are 4 excerpts that stood out to me, but the whole interview is good.

I’ll post one of the excerpts here because I like Carlin’s approach — he answers the question probabilistically (and his gambling mindset in general to handicapping answers is prevalent in the way he reasons) but explains the framework he is adopting to approach the question.

[Meta observation: Answers to questions often fall out trivially from the model you choose to approach it, so it’s a reminder that your choice of model in the first place is critical — any ensuing logic will unconsciously inherit its assumptions. The work of overriding assumptions to adjust for differences between the reference model and the question at hand is where devilish details lie. But when encountering an argument, it’s a good idea to question the choice of model before quibbling over details.]

On to the excerpt:

Lex asks how we will “destroy ourselves”. Carlin gives a framework for handicapping what calamity will undo us.

Lex: If you were to wager on the method in which human civilization collapses, rendering the result unrecognizable as progress, what would be your prediction? Nuclear weapons? A societal breakdown through traditional war? Engineered pandemics, nanotechnology, artificial intelligence, or something we haven’t anticipated? Do you perceive a way humans might self-destruct or might we endure indefinitely?

Dan’s response (emphasis mine):

My perspective is primarily influenced by our ability to unite and focus collectively. This informs my estimates of the likelihood of one outcome versus another.

Consider the ’62 Cuban missile crisis. We faced the potential of nuclear war head-on. That, in my view, is a hopeful moment. It was one of the few instances in our history where nuclear war seemed almost certain. Now, I’m no ardent Kennedy admirer, despite growing up during a time when he was almost revered, especially among Democrats. However, I believe John F. Kennedy, acting alone, likely made decisions that spared the lives of over a hundred million people, countering those around him who preferred the path leading to disaster.

Reviewing that now, a betting person would have predicted otherwise. This rarity underpins our discussions about the world’s end. The power to prevent catastrophe was in the hands of a single individual, rather than a collective.

I trust people at an individual level, but when we unite, we often resemble a herd, degrading to the lowest common denominator. This situation allowed the high ethical principles of one human to dictate the course of events.

When we must act collectively, I become more pessimistic. Consider our treatment of the planet. Our discussions predominantly center around climate change, which I believe is too narrow a focus. I become frustrated when we debate whether it’s occurring and if humans are responsible. Just consider the trash. Disregard climate for a moment; we’re harming the planet simply through neglect. Making the necessary changes to rectify this would necessitate collective sacrifice, requiring a significant consensus. If we need around eighty-five percent agreement worldwide, the task becomes daunting. It’s no longer about one person like John F. Kennedy making a single decisive move. Therefore, from a betting perspective, this seems the most likely scenario for our downfall as it demands a massive collective action.

Current systems may not even be in place to manage this. We would need the cooperation of intergovernmental bodies, now largely discredited, and the national interests of individual countries would need to be overridden. The myriad elements that need to align in a short span of time, where we don’t have centuries to devise solutions, make this scenario the most probable simply because the measures we would need to undertake to avoid it appear the least likely.”

[a later thread that rounds out his thinking on this]

“Returning to our primitive instincts, we are conditioned to address immediate and overwhelming threats. I hold a considerable amount of faith in humanity’s response to imminent danger. If we were facing a cataclysmic event such as a planet-threatening explosion, I believe humanity could muster the necessary strength, empower the right individuals, and make the required sacrifices. However, it’s environmental pollution and climate change that pose a different challenge.

What makes these threats particularly insidious is their slow development. They defy our innate fight or flight mechanisms and contradict our ability to confront immediate dangers. Addressing these problems requires a level of foresight. While some individuals can handle this, the majority are more concerned, understandably so, about immediate threats rather than those looming for the next generation.

Could we engage in a nuclear war? Absolutely. However, there’s sufficient inertia against this due to people’s instinctive understanding. If I, as India, decide to launch an attack against China, it’s clear that we will have 50 million casualties tomorrow. If we suggest that the entire planet’s population could be extinguished in three generations if we don’t act now, the evolutionary trajectory of our species might hinder our response.”

The remaining excerpts cover:

  • An example of how propaganda can scramble your beliefs in a way that creates collective distortions that are hard to see
  • The problem with dictators or strongmen even if they are wise and benevolent
  • Will the US tear itself apart in a second civil war?

[Note: I used GPT-4 to clean up sections of this transcript:]

Money Angle

Here’s a stream of consciousness reflecting on a few recent private convos jambalayed with some of Dan Carlin’s thoughts.

I was hanging out with a good buddy (and former biz partner) and talking shop a bit about the options biz. I’ve heard about how implied correlation is “trading in the 0th percentile” but that selling it continues to be profitable in 2023 because it’s “realizing” even less than implied (to be clear he runs a big strategy and we don’t discuss what he does so there is no suggestion that he is also doing this. He merely confirmed that implied corr was historically low). This reminded me of the misery that was 2017, where the best trade would have been to just lay into single-digit SPX vol because realized vol was so low you’d wonder if the stock market even opened anymore. The opening bell rings and you immediately ask “What’s for lunch?”.

While we were walking around Ghirardelli Square, my boy made a throwaway comment that my mind hasn’t emptied from the trash.

The hard leg is always where the money is.

I thought about how, in 2021, the dumbest possible idea — buying a dog coin — was the best trade at one point and shorting it was too at a different point. But both were hard at the ripest times to do it and easiest when they were riskiest.

I thought about the double lot property I looked at this week with a realtor friend (the same one who sold both my house and my biz partner’s — if you are in the East Bay I’d be happy to intro. Good realtors are like good mechanics — gold amongst pyrite). There’s no math that makes the price of the homes make sense. Property in a specific location has little substitute and just trades like art. As my realtor properly diagnoses — “Kris, you’re like my lawyer father, you see the risk. But the people who win these auctions only see their family on a Christmas card”. This was not a knock on those people. As my friend Jared likes to say, their bank accounts have a phone number in them — I’ve seen enough behavior here to know that while folks aren’t Miami-flashy, a Ferrari is a rounding error sum of money in a home negotiation, not a decision. If you move from the Bay Area or NYC your bid would be obnoxious to the locals too.

It feels to me that everything is a momentum trade — selling dispersion at low levels, buying homes at 0 after-expense cap rates, having no top on what you’d pay for Harvard, hell, it’s an imperfect measure but even stock market earnings yield is less than t-bills.

It’s all momentum until some grand event makes it abundantly clear that the world has changed. Then you get the situation currently embodied in the no-bid CRE markets of say SF and Chicago.

Liquidity is utterly discontinuous in such a world. Value will become increasingly resistant to traditional measurement because there is so much wealth in search of a return you can reason that any opportunity where the math makes in a textbook spreadsheet, the value is sitting on a landmine, already passed on by the infinitely patient family offices of moguls who are not forced to chase LP-friendly payoff diagrams.

I chatted this week with another good friend who finds and stacks strategies at a well-known pod shop. He talked about a trend he had seen in motion much earlier — the accelerating difficulty in finding talent/alpha. He’s impressed at the speed at which the market for alpha is getting efficient but this is what you’d expect when pods are eating the investment world. Millenium manages $50B that is laser-focused on uncorrelated skill (grapevine tells me they increased how many pods that trade dispersion in recent years — cue the “markets are biology not physics” analogy — which means the marginal bid for single stock vol has increased. This actually means the environment for covered call selling might be unusually nice. This doesn’t contradict my broad admonitions about call-selling. It actually makes my point — that you should be discerning about the practice and not think of it as passive income or free money but understand what circumstances make the strategy more or less ripe.)

All of this makes me wonder about the distribution of investment outcomes in aggregate. Suppose the underlying economy is steady. Does the median return increase at the expense of the left tail (keeping the expectancy the same)? In a world where capital is more easily deployed and more concentrated, what happens to the shape of returns?

Look at the deal the Saudis have offered Mbappé or their pot-splashing with LIV golf. It all feels related. Financialization, private-equityization, Softbankization. Increasing rewards for capturing attention (see athletes or Cathie Wood). The internalization of rage bait as a social media strategy. Twitter X is rapidly being consumed by engagement tactics (dystopian thought: this trains people to be numb as they will eventually adopt defenses against engagement until we lose the ability to know what we should pay attention to). The harder profit is to find the greater the temptation to cut another forest down. We are great at identifying growth. Less great at understanding its costs. Wouldn’t be a bad tagline for America if taglines were honest.

(In Dan Carlin’s slavery pod I felt that the moral concerns didn’t gain steam until the cost of enslaving Africans became more apparent. You know that expression “narrative follows price”? Maybe we don’t moralize until a loathsome but profitable practice reaches its blood-from-a-stone phase and the cost of moralizing is lower. If you try on that perceptive for a day you’ll either want to claw your eyes out or you’ve already sold humanity to zero.]

All of this echoes Dan Carlin’s suspicion that our undoing will be collective action problems. If you believe that the logic of efficient markets (a collective action coordination mechanism that differs from democracy) is playing itself out in a rules landscape that has significant divergences from the political question of “what is good for broad-based flourishing”? You could imagine capitalism resting on many different types of rule frameworks. But you’d also expect the ruling framework, the one called a “free market”, to be shaped by its victors (corporations are people too, right?).

To Carlin again — propaganda can scramble your beliefs in a way that creates collective distortions that are hard to see

[Carlin is a war historian and while he admits to his bias towards individualistic ideals “I’m famously one of those people who buys into the ideas of traditional Americanism”, his characteristic nuance is well-displayed in his deep skepticism of the “military-industrial complex” and how its inclination towards self-preservation as an institution often exerts undue influence in when America looks at its menu of choices]

“Many people living today seem to think that patriotism requires a belief in a strong military and all the features we have in the present. However, this is a departure from traditional Americanism, which viewed such elements with suspicion during the first hundred years of the republic. They saw them as foes to the very values that Americans celebrated. The question arises, how could freedom, liberty, and individualistic expression thrive with an overarching military always engaged in warfare?

The founders of this country examined examples such as Europe and concluded that standing militaries or armies were the enemy of liberty. Today, we have a standing army deeply woven into our society. If one could go back in time and converse with John Quincy Adams, an early president of the United States, and reveal our current situation, he would likely find it terrible and dreadful.

Somewhere in our history, Americans seemed to have strayed from their path and forgotten their founding principles. We have successfully combined the modern military-industrial complex with the traditional benefits of the American system and ideology, so much so that they have become entangled in our thought process. Just one hundred and fifty years ago, they were seen as polar opposites and a threat to each other. When discussions arise about the love of the nation, I harbor suspicion towards such sentiments.

I am wary of government and strive hard not to fall prey to manipulation. I perceive a substantial part of what they do as manipulation and propaganda. Therefore, I believe a healthy skepticism of the nation-state aligns perfectly with traditional Americanism.”

I’ll leave you with a thought — let’s do an analogy substitution.

What if the version of capitalism we endure today is the military-industrial complex and Georgism is actually more aligned with the meritocratic principles this country is supposedly based on?

Money Angle For Masochists

My biz partner friend is way more of a math guy than me. If you want to be a trader you’ll get more mileage studying gambling than investing. Although I’ve done some study of gambling, it’s nothing compared to my friend’s info diet. He’s been a giant sports analytics nerd for the past 20 years (one day I might share a story of his meeting with an NFL team owner. I get stressed thinking about it, so can’t imagine how my buddy feels).

I asked him for some book recs in the vein of Scorecasting written by AQR quant Tobias Moskowitz (you may remember me recommending his children’s novel Rookie Bookie).

The list:

  • Baseball Between the Numbers: Why Everything You Know About the Game Is Wrong
  • The Book: Playing the Percentages in Baseball
  • Seminal: Bill James
  • Win Shares
  • Basketball on Paper: Rules and Tools for Performance Analysis
  • The Expected Goals Philosophy: A Game-Changing Way of Analysing Football
  • The Hidden Game of Football: A Revolutionary Approach to the Game and Its Statistics

Finally, my internet friend Andrew is an independent trader who came out of the sports gambling world. I’ve spoken to him several times. Very smart, you should follow him and check out the sports modeling books he’s written:

From My Actual Life

We had a pair of 15-year-old Japanese exchange students stay with us this past week. Our kids have new older brothers — this crew loved each other. Play is a universal language.

Stay groovy ☮️

Moontower #193


Money Angle is long today because I have a new post out. For those who prefer existential brain damage instead of the investing kind here’s the most tingly thing I’ve read this week.

Happiness Is Bullshit (8 min read)
by David Pinsof

David is co-creator of Cards Against Humanity and holds a Ph.D. in psychology from UCLA. His focus is on evolutionary social science. The post shares my suspicious view of “happiness” which is best articulated by Mark Manson in this week’s Munchies but Pinsof hypothesizes about the purpose of happiness and its mechanics.

Money Angle

Combining regular and masochist Money Angles in one today because the topic is covered calls.

I’ve crusaded against the “income” framing of selling covered calls or cash-secured puts. See:

The emphasis of these posts is the idea that without a view on volatility and honest performance attribution, there’s a good chance that you are confusing the high hit rate (cough, “cash flow”) that coincides with option-selling strategies and real economic edge.

[Think of dividends for a moment.

A dividend is cash flow but it’s not some extra edge. If the dividend wasn’t paid out, the cash would live on the companies books and you would be able to create your own dividend by selling the stock on your own schedule (in fact, stock prices fall by the amount of a dividend reflecting the fact that the company now has less assets). It’s just a re-shuffling of cap gains to dividend income. It’s more of an accounting/IRS thing and if it says anything about a company economically, it might be: “here take your earnings back we don’t think it’s a great time to re-invest them in our operations”.

I’m simplifying the multitude of reasons why a company might pay a dividend but if you really want the cynical take, it’s because some melting ice cube company is leveraging boomer-coded marketing around “cash flow” to finagle its way to a lower cost of capital. I’m shooting from the hip here, I couldn’t prove this, but the number of investing books in Barnes and Noble with “dividends” or “options for income” is suspiciously similar and I’m guessing corporate CFOs are capable of noticing what I notice. Reflexivity means the outputs become inputs. Bottoms up!]

Beyond the posts above, the real lift is to show investors that when they trade options, whether they know it or not, they are speculating on some weird abstraction called “volatility” not direction.

I’ve published the short version of that demonstration in The Beauty of Option Theory:

If directional trading is the most common use of options, then covered calls and hedging are the next most common. We can use a “replication mindset” to understand that even when you sell covered calls (or hedge) you are, regardless of how promoters sell the idea, engaging in a volatility trade.

Consider my logic:

  • The alternative to selling a 20d call monthly: you can sell 20% of your position instead.
    1. Call selling: You get called away on your position about 1 in 5 months
    2. Selling the stock: you are out of your position in 5 months
  • The false accounting that the call seller uses to rationalize: “I get called away on my position less than 20% of the time so actually selling the calls is better”
  • Reality: You are failing to account for the times when the stock dives where you don’t get assigned on your short calls, but you would have been better off to have sold 20% of your position.

The spread between the false accounting and reality is a function of the volatility that was realized vs the IV you sold

When you sell covered calls, whether it was a better choice than just selling the equivalent fraction of your position depends on what vol is realized vs what vol you sold.

If you sell calls too cheap you are better off just selling a fraction of your position and that’s why you shouldn’t sell calls indiscriminately for “income”. You need to consider whether the price is right.

Stop thinking of options through the lens of directional trading — you are still just trading volatility.

While I hope that conveys the point, I know there’s more appetite for a deeper explanation based on discussions with people who are earnestly trying to learn options.

This new post is a hands-on walk-through:

Covered Calls Are Still Just A Vol Trade (Moontower)

Some highlights:

  • This homework will help a student understand why selling covered calls or cash-secured puts is not income. In fact, the student will see that options are always volatility trades — you will appreciate just how deeply insightful the concept of put-call parity is.
  • I lean on a familiar setup: a binomial stock price process with discrete outcome. I use this approach in most of my technical posts because it conveys most of the intuition with simple arithmetic. If you can compute and average or combination formula in Excel, you are good to go.The flow of the setup:
    • Set up the tree of outcomes (we recycle the same framework from What We Can Learn From Vertical Spreads)
    • Price the covered call we will sell and its delta. We don’t use a model. We can reason arithmetically about this.
    • We practice computing P/L for various scenarios
  • With computations now second nature, we can now get to the heart of the problem.
    • If you own a share of stock and it increases by $1, you enjoy a $1 profit and vice versa.
    • If you have a covered call strategy, and the stock increases by $1 you make $1 profit on your shares lose on your short calls. If you are short a 25% delta call, it will gain $.25 of value on that same $1 move.
      • Share position: +$1
      • Call position: -$.25Net P/L: +$.75

        [If the shares go down in value you will lose $.75 (-$1 on the shares and +$.25 on the short call position.]

    The key insight: at the inception of this portfolio you have a 75% exposure to the stock instead of 100%. You make or lose $.75 instead of $1 when the stock moves $1.

    If you are a professional options trader explicitly playing the abstract game of “trading volatility” you’d hedge the entire delta…you would not want to have exposure to direction because you have no opinion on the company as an investment.

    But the covered call seller clipping some coupon that “averages down their purchase price” or some marketing b.s. like that is now implicitly a volatility trader that just has a long bias.

    The difference between this investor and the volatility trader is the investor is not going to continuously rebalance their share position to maintain a constant exposure to the stock.

    [the other difference is the investor doesn’t realize they are now a “vol trader” but that’s the point of this whole post — to make this crystal clear]

    The volatility trader tries to maintain zero exposure.

    The covered call seller who sells a .25 delta call initiates a 75% exposure. However, the exposure is going to bounce around between 0 and 100% depending on how far the stock is from the strike price, how volatile the stock is, and how much time remains.

    This is easy to understand at the extremes. If you are short the 103 call and long a share of stock trading for $200 you no longer have any marginal exposure to the price. If the stock goes to $199 or $201 you are unaffected. The owner of the call you are short is the one exposed to the stock. You can think of them as owning the shares that are in your account. Similarly, if the stock is trading for $10, you own 100% of the exposure. The 103 call you are short is worthless because it’s so far out-of-the-money.

  • We are ready to get our hands dirty again to explore the problem:⚖️Portfolio Comparisons

    Because the investor who sells covered calls is not explicitly “trading vol” they are not rebalancing. In our example, they are long the stock, short the .25 delta call, and just close their eyes until expiration.

    This provides a perfect Socratic problem to work through to understand why the moment they traded an option they became vol traders.

    Let’s continue.

    You already computed the p/l for the covered call portfolio for every expiration scenario. The equivalent portfolio exposure that does not use options is to:

    Simply sell 25% of your shares and hold the remaining 75%

    This portfolio is initially equivalent to the covered call portfolio — it participates at 75% of the stock’s moves. And that will always be true. The covered call portfolio’s net exposure changes, as described earlier, but this is exactly why we can learn what it actually means to trade an option. This comparsion will cut straight to the heart of options.

    In sum, there are 2 portfolios:

    A) Covered Call Portfolio consisting of:

    • 1 long share from a price of $100
    • 1 short 103-strike call at a price of $.69 (initially a .25 delta call)

    B) Reduced Position Portfolio consisting of:

    • Long .75 of a share
  • We arrive at a milestoneIf we compare selling a covered call to an alternative position where we just sell an equivalent delta worth of shares instead of selling a call, we see a very clear picture.

    The covered call strategy is short volatility compared to the Reduced Position portfolio. It will outperform if the stock doesn’t make a large move and underperform if it does.

    It simply doesn’t matter that you sold a call or a put or straddle or a strangle. If you sell an option, you are short volatility even if it’s a covered call or cash secured put.

    The outcome of trading an option as opposed to just taking an equivalent option-free exposure will depend on what “volatility” you sold versus what volatility was experienced.

    If you don’t have a view on volatility that differs from the market consensus (ie implied vol), the alternative portfolio where you trim your position by the delta of the option you would have sold, achieves the same exposure. (This is true over lots of trials which is how you should think about investing anyway).

The ensuing discussion allows us to internalize, generalize and relate the concepts to real-life investing decisions.

In our ongoing example, the option was sold at a fair price assuming the stock would move $1 per day. The remaining discussion will bootstrap your intuition for how the difference between implied volatility and realized volatility affects even a covered call portfolio held until expiration.

How volatility impacts your covered call option trade

We continue to assume you sold the 103-strike call at $.69, the fair value for the option if the stock moves $1 per day. It is rare that you trade an option at exactly the level of volatility the stock realizes until expiration.

Let’s look at the relative performance of the Covered Call vs Reduced Position for several scenarios. In each scenario we will examine:

  • Excess return charts showing the p/l of the Covered Call Portfolio minus the Reduced Position, (ie 75% exposure portfolio) at each possible expiration price.
  • The probability or “hit ratio” of how often the Covered Call Portfolio outperforms the Reduced Position exposure
  • The expectancy of the Covered Call portfolio based on how much volatility the stock ends up experiencingRemember, we expected the stock to move $1 per day which gave us a fair value of $.69 for the 103 call. Let’s see what happens when the realized volatility differs.

    For example, what if the stock only moves $.90 per day?

    You’ll find plenty of pictures inside these scenarios:

Things to note in the table:

  • The skew in the results is what you expect if you decide to sell covered calls instead of just cutting your equity exposure…you are short an option.
  • The justification for choosing to sell an option should demonstrate why it’s positive expected value to do so. This is not easy. You will experience a high win rate even when you sell the option too cheap (like in the “high vol” scenario). Even in the extremely high-vol scenario where you have made a disastrous trade you still win 1/3 of the time. The gap between win rate and expectancy is where the dragons of marketing and charlatans live.
  • Options are not cheap to trade. Optically they may appear so but they are highly leveraged — study the table and you can intuit the relationship between those pennies and annualized return. The flip side of this shows why market-making is such a lucrative business. The fraction of a penny you don’t sweat is used to pay for private jets and political influence.

A concluding thought:

Put-call parity is not some dry academic idea. It is a profoundly deep insight. It does not matter which specific option expression you choose. The moment you opened an option account you committed to having a view on volatility. All the rhetoric around retail options trading is eliding the fact that the typical option user is poorly equipped to assess if volatility is cheap or expensive and without such a view should not be trading an instrument whose value depends on it.

The pitches all focus on the cadence of your returns…consistent income without confronting what really matters — is the option you are trading the right price? And without a view on volatility, you have no idea.

Stay groovy ☮️

Moontower #192


I’m still in summer travel mode but I stole some time to write homework-type post related to options. I talk about it below.

Otherwise, here are some links:

1) If you wanna follow me on Meta’s Twitter clone that they released this week:

2) With all the travel, I’ve had a chance to hang out with lots of family and friends who are not the terminally online types (sounds healthy). ChatGPT came up in a lot of convos and I thought sharing these links more broadly, especially for people that are not immersed in the discourse, might be useful.

  • 10 Ways You Can Use ChatGPT to Learn Better (Scott H Young)Scott is one of my favorite writers on all things learning. This was a good post for separating what ChatGPT is good and for. The term “word calculator” has stuck with me.
  • GPT Best Practices (Open AI)This interactive document from the creators of ChatGPT gives sugeestion and provides an in-line sandbox for you to practice yourself.

Money Angle

Continuing with the GPT resources:

ChatGPT for Finance: Promise and Peril (Dave Nadig)

Again, I’m just cherry-picking resources from writers and thinkers I trust. Dave put together a really nice guide here, and it assumes no knowledge so even if you tinker a bit some of the background he provides really helps fill in the gaps.

It opens:

Over the past month or so, my inbox and DMs have been flooded with questions about AI, in no small part due to my interview with Professor Stuart Russell at Berkeley and our recent webinar with ROBO Global’s Zeno Mercer and Resolve Asset Management’s Adam Butler. One crystal-clear pattern has emerged. Everyone wants real-world, specific examples of how AI can and can’t enter into an advisor’s, investor’s, or creator’s workflow.

I aim to please. Today, I will peel back the curtain and give concrete examples of how to use ChatGPT effectively to accelerate investment research and content creation. Meanwhile, I’ll also dispel some of the hyperbole around what ChatGPT can and can’t do.

Money Angle For Masochists

This is today’s meat. It’s a long post that includes exercises for the reader. I built it in a modular way so even if you didn’t want to go full brain damage there are useful sections that can stand alone from the whole.

What We Can Learn From Vertical Spreads (Moontower)


First, a self-indulgent remark…

I enjoy helping people learn about options. Not for instrumental reasons like the “world needs more options traders”. But in an appreciative sense — option theory is a rich toolbox for decision-making in investing and life in general. The word “decision” implies an option.

Notwithstanding, the typical person learning about options is thinking instrumentally — “how do I use these things to make money?” Of course, there’s no blog post or even book-sized answer to this question. As any craft goes, there’s basic vocabulary and principles, but these are necessary but insufficient conditions for success. You need years of trial and error to achieve competence.

Since trading/investing is a low signal-to-noise endeavor your epistemology requires strict discipline — the flip side of narrow bid-ask spreads and low-cost trading means your lack of edge can be masked for a long time. You know a loan shark is a bad deal, so you only visit Sleepy Sal as a last resort. But one broken kneecap and your LTV goes to zero. Brutal but honest. Everyone understands the deal.

Meanwhile, Robinhood administers the morphine of hidden fees to lengthen the duration of its most valuable asset — your overconfidence. Robinhood calls itself Robinhood without a hint of irony. They ate the whole wheel of cheese. I’m not even mad, I’m impressed.

Good news

At risk of pollyanna-posting, I’ll propose just getting smarter. If you have read this far you are totally capable of learning. Unsurprisingly, options discourse either tends to one of 2 poles:

  • Physics-esque math geekdom Jargon-heavy complexity certainly has a place in finance but is best ignored as a small ecological niche.
  • The “option premiums are to be sold for passive income” grift I’ve covered why this frame is nonsense ad nauseum hereherehere, and indirectly in almost all my writing.

There is a needle to be thread between these framings.

With no more than HS or even middle school math, you have enough tools to tinker and build intuition alongside your live experimentation. This homework is an example of what I’m talking about.

The purpose of this exercise

I get approached for help with options by retail traders frequently. On the one hand, it puts me in an uneasy situation — I’m not really a fan of people using their precious human capital on a machine that conspires to make you think it’s worth trying when base rates say otherwise. On the other hand, who the hell am I to discourage grown-ups who have read the disclaimers and proceed anyway. On balance, it’s a good thing that card-counting books are on the shelves even if most people who fancy themselves Ed Thorp are delusional about what it takes.

So it goes….my sympathies point to being helpful even if the occasional learner impales themselves. They probably would have anyway and there are more people that will be saved by either re-allocating their attention when they realize this is a grind or shed the misunderstandings that keep them plateaued.

All of this really cuts to the heart of Moontower’s approach to unlocking others: part Zen and The Art Of Options Trading, part shedding misunderstandings.

I can’t give you answers, but I can help rule out wrong answers. In that spirit, this exercise, despite its simplicity, will stimulate growth-inducing reflection.

The origin of this exercise

A reader approached me about a strategy they were exploring. It was familiar because it belonged to the class of strategies I’d describe as “harvesting”. Sell some variation of optionality (cash-secured puts, covered calls, iron condors, strangles, etc), earn steady profits.

This reader is selling downside butterflies on the SP500.

When someone has researched a strategy, they are mentally invested in confirming that it works. So right off the bat, I was heartened by the reader’s honest approach — “Kris, tell me what’s wrong with my strategy?”

It’s a fair question. But it’s not quite the right question.

  1. I haven’t done the work so I’m not in the best position to say whether the strategy is good or bad but more importantly…
  1. The “teach a man to fish” Socratic lesson is to demonstrate the implicit misunderstandings of the reader’s approach. That will lead them to higher-resolution questions that will scaffold their ability to answer the original question.

Part I: Setup

  1. The scenario that underpins the exercise and assumptions are given
  2. I hold the reader’s hand as they build a binomial tree.
  3. The reader prices options on the tree. No option models. Just arithmetic.

Interlude: Discussion About Spreads and Specifically Option Spreads

A word on spread trading in general

Every trade is based on a model of how the world works, even if that model is as basic as “stocks go up on sunny days in Chicago”. Models by definition are simplified representations of how things work.

When we spread trade (buying one instrument and selling a related instrument) we cancel out some amount of model-risk. If our stock valuation model is based on interest rates, when we buy and sell related stocks we are sterilizing the assumptions of model by letting them offset. Of course, not every stock is equally sensitive to interest rates or whatever parameters our model takes, but the principle of offsetting remains substantial.

In the work you did above, you priced options in an actuarial manner based on an easily computable distribution. In the real world, model such as Black Scholes allow us to price options with continuous distributions and with a set of assumptions about how prices evolve. Everyone knows the assumptions break down in real life but the model’s value is not in its accuracy in absolute terms but as a measure or ruler.

If you have a broken scale, it will not represent your weight accurately but it will still be useful for comparing your weight to mine. How we calibrate a function depends on the use case. Similarly, my guitar can be tuned to itself so that it can reproduce a song pleasantly. But as soon as I start playing with others we need to make sure the group is in tune.

💡A word on spread trading in options

An early lesson for options traders is the value of spreads in risk management. I can offset option risks such as exposure to delta, vega, gamma and so on by taking an opposing position in a similar option.

Vertical spreads, where you buy and sell options of different strikes in the same maturity, are terrific examples of this. They allow us to sterilize the impact of bad assumptions in the model itself by reducing the risk to simply distribution. Distributional risks are benign, like over/under bets. The max loss is known and we are insulated from risks like bad interest rate or volatility assumptions.

The closer the strikes are to each other the more the risks offset. As they get further apart the risks increase. We become more vulnerable to discontinuities in our assumptions. Imagine a $100 stock. If I told you that Carl Icahn would make a cash takeover bid of $120 IF the stock dropped below $95 (suppose he knew the board would be far likelier to accept in that scenario) then a naively continuous model would not realize that the 117 strike and 123 strike don’t have a regular relationship to one another. The distribution is not smooth between these points.

The less 2 instruments (or strikes) are related the less insulation you get from model assumptions you get from hedging.

Generally speaking, when we trade narrow vertical spreads or butterflies (which are spreads of spreads — even more insulation) we can say our position is “model-free”. Your risks are more proportional to distributional probability than magnitude which is a more benign circumstance.

Part II: Understanding Vertical Spreads and Butterflies

Quick Refresher on Vertical Spreads

  1. We price call spreads
  2. We price put spreads from the call spreads (as opposed to pricing puts first!)
    This is derived from something call an option “box” — these are usually understood in the context of an alternative to t-bills.

    But they are also the key to understanding put-call parity between vertical spreads!

    The value of a put spread must be equal to:

    The difference between the strikes – the value of the call spread

    To see why, consider the following structures:

    • Long the 100 call, short the 100 put No matter what happens at expiration, you will be buying the stock for $100.
      • If the stock expires above $100, you will exercise the call
      • If the stock expires below $100, you will be assigned on the put

        This position acts exactly like a long stock position and in fact is often referred to as “synthetic stock” or “combo”.

        Let’s consider the opposite position on another strike.

    • Short the 105 call, long the 105 put This is short synthetic stock. No matter what happens, at expiry you will be short the stock at $105. You are short the 105 “combo”.

      Ok, combining these ideas:

      • Long the 100 combo
      • Short the 105 combo
    notion image

    Net result: At expiry, you will buy the stock for $100 and sell it at $105.

    This structure is known as a “box”

    Of course, if you expect to make $5 profit on expiration, in a world where there is no free money, you can expect this structure to cost you the present value of $5 today.

    I can see you wondering “Kris, what the heck does this have to do with put spreads?”

    Look at the picture again.

    notion image

    A box can be decomposed into:

    Long the 100/105 call spread


    Long the 105/10 put spread

    The sum of these structures must equal the value of the box which equals the distance between the strikes!

    Re-arranging: Box – Call Spread = Put Spread

    In our example, the 100/105 call spread is worth $1.85.

    Box – Call Spread = Put Spread

    $5 – $1.85 = $3.15 = 105/100 put spread

    You can use this identity to price all the put spreads simply from knowing the call spreads!

  3. We dive into the pricing of butterflies and appreciate them for what they really are: a spread of spreads!

Part III: Reasoning About Strategies and Extraplolating To Decision-Making In General

This tutorial was a response to a reader who wanted to know if their butterfly selling strategy was sound.

We built a simple binomial stock model to underpin pricing for calls, puts and vertical spreads. Ideally, this exercise, should have helped the reader to isolate what types of questions they to consider to hone in on their ultimate question:

“Does selling butterflies make sense?”

If those questions remain hard to infer then hopefully the subsequent Socratic discussion will help. The flow of the questions should be helpful to anyone engaged in a repeated strategy.

  1. Through a series of exercises, we study the risk and reward of vertical spreads and butterflies
  2. We conclude with inferences and discussion. I’ll re-print 2 sections of that here.

Why you should resist the seduction of high hit rate strategies

If a strategy has a high hit rate, it is operating on a highly skewed trade. Your high hit ratio tells you nothing about whether this strategy is profitable in the economic sense of the word. It takes a very long time/large sample to learn anything about how well you calibrated on low probability events. If something you believe to be a 1% probability is actually a 2% probability you are wrong by 100%. That will be reflected in the payoff space — something that you are accepting 50-1 odds for should demand 100-1 odds. If you insist on conflating positive expectancy with hit rates you could save yourself the headache and just run a martingale strategy in a casino. You’ll have negative edge but you’ll probably win and at least you’ll get some free drinks and a hotel room. I’m not arguing that you have negative expectancy on your skewed strategy, but the burden of proof is on you to prove otherwise and the point is that the more skewed the payoff of the strategy is the worse the epistemological foundation for your conclusions. Which means you can never really push. And if you know today, that you are building a strategy you can’t push too hard, then the question is it worth pursuing in the first place (it’s a bit meta but it feels like another tree with conditional probabilities at the nodes).

Addressing the original reader

The reader who reached said something I’ve heard in various forms:

”I’m selling downside because the market drifts upwards”

By having this exercise mimic this idea by biasing the coin probability to the upside and then pricing the spreads we can see that the market is already assigning a lower probability to the downside.

In real-life, implied skew makes the put spreads worth less; this exercise kluges that. So when you sell those put spreads using “markets go up” logic you are doing the same thing as someone bets on the Nuggets because they’ll probably win — brah, it’s already in the price. Your job is to find why the price is wrong.

From My Actual Life

On my 35th birthday, Yinh and I rolled into the hospital in SF to induce the birth of our first kid. He was stubborn and didn’t want to share a birthday — he came the next day.

This coming week we will celebrate Zak’s 10th birthday. I’ll save the sappiness for the letter I will give him. But as I reflect on the caboose end of the years where his mother and I are the center of his world, the tension of preserving his joy and innocence while preparing him for the future feels like it’s about to go up a notch.

Still, if it wasn’t confusing that would be its own source of worry.

Stay groovy!



I’ll be in LA Thursday with my boy Khe.

Come hang out

Moontower #191


I’m just popping in to offer a few fun bits. Our summer travels have included excursions in Northern California, NJ, and now Europe. Today’s format is a casual one-off. Routine posting will resume sometime in August unless I need to release some verbal exhaust between now and then.

Northern California — Dunsmuir

Over Memorial Day weekend we explored the area of Dunsmuir, CA near Mount Shasta. A few highlights:


We did one waterfall on each of the 3 days. With the record rains this winter they were gushing!

  • McCloud upper, middle, and lower falls
  • Burney Falls (the largest waterfall in CA)
  • Mossbrae Falls (the 25-minute walk along the rail tracks to the falls was one of my favorite treks ever — Stand By Me meets a scene from the gold rush as the passage is hemmed by mountain on one side and rushing white water on the other).


  • Yak’s on the Five. In the running for best burger I’ve ever had. I spent 30 minutes talking to its founder. Her stories would warrant their own post.
  • The Wheelhouse in Dunsmuir is casual bar fare — but has an epic boardgame collection rivaling any nerd cafe. I picked up a game on my wishlist…Sheriff of Nottingham. A delightful habit to offer your future self is to keep wishlists and when you come upon one of its entries at a mom-and-pop shop you don’t think twice, you just lift it. Games are a relatively modest indulgence and it’s tempting to just treat them like books, give Bezos his tribute and just load them into a cart all at once. But it’s more fun to manufacture delight by creating artificial scavenger hunts for your interests.


  • Railroad Park Resort: Spend a night on a decommissioned caboose or other train cars. Super charming property and if you have kids in train phase (mine have outgrown it) this is doubly recommended.
  • Mossbrae Hotel: I loved the aesthetic and design of this place. Comfortably sized rooms that marry the best of vintage and new. The details are carefully curated and its reasonably priced. We had 4 families so we took up all but one of the rooms on the upstairs level so if you go with a group it’s like taking over a hotel. Gave me warm Hudson River bed and breakfast vibes without the doilies.

Northern California — Lake Tahoe

Last weekend I was in Tahoe for an investment retreat called the Collective where I was invited to speak (in Munchies I published some thoughts).

For one of the excursions, I took a clear kayak on Lake Tahoe.

Our guide was a kick-ass outdoorsman, ex-Marine, super curious, and generally really kind and fun to talk to.

I learned lots of fascinating bits about Tahoe. Here’s what I can remember.


  • Tahoe is an alpine lake at about 6,200 feet of elevation. It was carved out by a giant glacier.
  • Lake Tahoe is the second deepest lake in the US (by max depth) and has an average depth of 1000 ft
  • If you spilled the water across California it would cover the state in 15 inches of water. It contains nearly 40 trillion gallons. (By comparison, the contents of Lake Superior, the country’s 3rd deepest lake, would cover all of North and South America in 1 foot of water! And that’s just one of the Great Lakes although the largest)
  • On a hot day, 330 million gallons of water can be lost to evaporation. A large evergreen tree is capable of absorbing nearly 100 gallons of water vapor in a single day!

Why Tahoe water is so clear

3 reasons

  • Its core temperature is 39 degrees. Not a lot of plant life can withstand that.
  • The lake is fed by over 40 tributaries instead of one giant sediment-producing river.
  • In the 1920s, the National Forest Service introduced the western beaver to the area. Their dams filter the snowmelt.

A Dark History

Monster babies

The Washoe tribe inhabited the Tahoe area for between 1,000 and 10,000 years before American settlers arrived. The word “Tahoe” is a derived from the Washoe name for the lake which translates to “the water’s edge”

The Washoe called it water’s edge because they actually never went into the lake. They fished from the shore. They never entered the lake because they believed it was teeming with bad spirits.


In a tradition you might associate with Spartans, the Washoe were known to sacrifice babies they deemed unfit such as those born with birth defects.

The Washoe would toss the babies from Cave Rock 400ft into the lake (Cave Rock is in the South Lake Tahoe area).

The bad spirits were from the so-called sacrificial “monster babies”.

“Tahoe Dance Floor”

The core of the lake is 39 degrees and because of its volume it never freezes over. It’s also cold enough to preserve dead bodies. It’s estimated that 250 people have died in the lake in the past 100 years. Sometimes when a body is discovered (in a relatively recent case a diver lost for 17 years) they are often well preserved.

Because of the interplay of water depth pressure and atmospheric pressure at elevation, bodies do not sink to the bottom but can actually find themselves suspended in a band of water at about 400 ft conjuring an image of a spooky dance floor.


The mafia was very active in the region especially nearby casinos on the Nevada side. The mobsters had mansions on the north side of the lake where they would throw parties. The lights displayed on the outside of the homes would advertise the type of party. One color meant “family-friendly”. Another meant keep your wife and kids at home — girlfriends only.

The second deepest lake in the country offered more than stunning views for entertainment. It was a convenient grave. While it’s unclear if Scissor Sal or Angelo Armpits found the Tahoe Dance floor scuba diving, they weren’t taking chances. They secured victims’ feet in buckets of cement before casting them in the cold lake. If they made it to the bottom you can imagine why we call them “statues”.

Enough darkness, time for a nice story

Our guide told us of a beaver family he’s been following for years. As he tells it, there was a beaver couple that started by building a bungalow and as time passed it had grown to a “5-star lodge”. At this point they had a litter of “kits” or baby beavers that are the size of guinea pigs. 2 kits would jump on each parent’s back to get around.

As the kits grew and reached sexual maturity it was their turn to launch. On their own, they would create their own families. The guide gushed in the 3rd generation of beavers the way one might dote on their own children.

There was one beaver on the lake that had established a degree of local notoriety — his name is Chunk. For one season whenever the guide took out a kayak tour, Chunk would show up like clockwork. Chunk’s commitment to punctuality afforded our guide a pleasant subterfuge…as the tour approached Chunk’s territory, the guide would make outrageous calls tricking guests into believing he was a beaver whisperer.

What the guide realized eventually was Chunk was using the kayaks as an escort so he could travel undetected to his work site without tipping off his nemesis — coyotes. Clever beaver.


One day, as the guide led the tour, Chunk didn’t hold up his end of the ruse. The guide nervously looked around eventually spotting Chunk hanging out on the shore. It wasn’t a great day to break the routine. Close by, a mama coyote was on watch as her three cubs played and wrestled.

A conundrum. On one hand, nature is just that — natural. Red in tooth and claw as the saying goes. On the other — “Come on, it’s my boy Chunk”. Respecting his role as just another animal in Earth’s grace and wrath, both terms imbuing far too much teleological significance to an otherwise routine moment on the trail of cosmos, the guide sat back. The tour had gotten real.

Real fast too.

Mama suddenly went into stalk mode. Tense, straight as an arrow from head to tail. As she slowly crept towards Chunk, the cubs assumed the hunt position, following Mama as school was now in session.

She crept closer to Chunk until her pounce was sure. Latching on to Chunk’s tail only to be mirrored by her babies who practiced the hunt on a nearby branch.

Chunk desperately clawed towards the cold refuge of the lake, bad spirits be damned. Mama extended her paws forward, digging into the sand, her back braced in opposition for the life and death tug of war with our beaver friend’s powerful tail.

What I haven’t told you is that the American western beaver can grow to over 100 lbs and if Chunk’s name didn’t give it away already you can be certain he was testing the upper limit. At twice the weight of a typical adult coyote, what Chunk lacked in munition he made up in physics.

Today, Chunk still scoots around the lake, wiser probably. A local legend whose nickname born of rotundity foreshadowed what would be missing from his tail.

A tip — Taylor Creek

In the 1950’s the National Forest Service introduced a particular species of salmon to the lake. The fish lifecycle is 4 years with them swimming upstream at Taylor Creek in their final season of life. At the start of autumn, the females spawn eggs that males fertilize before the fish expire. In the spring the snowmelt will wash the hatched babies into the lake to renew the cycle.

If you visit Taylor Creek in late September/early October you will see red. The fish are scattered everywhere, even in the trees. It’s a smorgasbord for the local black bears who gluttonously make their way through the salmon’s gathering place which doubles as a nursery and mortuary. Eating only the heads before retreating back to cover in the day, the bears are ready for the coming winter. If you arrive at the end of the spawning season (it lasts about a month) expect the odious stench of dead fish. But you will also be rewarded with the clearest waters of the year.

Lake Tahoe’s beauty rivals anywhere on Earth and it is right here in our backyards. Keep it blue. And if you’re in Tahoe and want to do the tour let me know and I’ll connect you with our guide.

A final travel tip

Check out Google’s MyMaps For planning Itineraries

This is a copy of the London map I created with 3 “layers” that you can toggle for food, activities, or walking around. (MyMaps)

These are useful to share with your fellow travelers. There are lots of options for changing icons or tricking the maps out as you like.

London and Stockholm are coming up next.

…and a game recommendation

Grab 7 friends, split yourself into 2 teams of four and play Captain Sonar. It’s what you wanted Battleship to actually be.

This is a video review by my favorite game review channel.

The game requires tons of speedy thinking and communication with your team. There are no turns so it has that open-outcry free-for-all flow.

It was a huge hit with the family, from the 9-year-olds to the adults. There are 4 different roles to be played per team — the radio operators should wear antiperspirant…and maybe consider Ritalin to get an edge.

☮️ Stay groovy this summer!

Moontower #190

I have a beautiful book recommendation today:

Math Games With Bad Drawings by Ben Orlin

The big, bright hardcover will grace any coffee table but even better — it’s meant to be used.

notion image

From the description:

From beloved math popularizer Ben Orlin comes a masterfully compiled collection of dozens of playable mathematical games.

This ultimate game chest draws on mathematical curios, childhood classics, and soon-to-be classics, each hand-chosen to be (1) fun, (2) thought-provoking, and (3) easy to play. With just paper, pens, and the occasional handful of coins, you and a partner can enjoy hours of fun—and hours of challenge.

Orlin’s sly humor, expansive knowledge, and so-bad-they’re-good drawings show us how simple rules summon our best thinking.

The book has five sections:

  1. Spatial Games
  2. Number Games
  3. Combination Games
  4. Games of Risk and Reward
  5. Information Games

For each game you are given the rules, the “tasting notes” for the game, why the embedded math matters and how it relates to your life more broadly.

There are 3 games I bring special attention to because they relate easily to the topics discussed in Moontower.

A Game of Risk and Reward


This is a multi-player version of a game that helps you tune your confidence calibration. We do a version of this when we onboard applicants to PitBulls because in trading you rarely know the “right” answer. A key meta-skill is to handicap how the odds that your proposed answer is right or wrong.

If you are overconfident in trading you make your markets too tight. That means you’ll get all the market share and find yourself sad for selling $1 bills for 95 cents.

If you are too conservative (ie too wide) in your markets or ranges you’ll never trade. You’re the person bidding 15 p/e for the SP500…go away, nobody cares about your irrelevant bid.

Calibration is a learned skill. Nobody comes out of the womb a great bettor. This is a foundational belief of training programs in trading and books like Superforecasting (see notes) or Thinking In Bets. You learn by practicing. Outrangeous is a way to practice with friends whether you’re on a long road trip or standing in line at Six Flags (a good question might be “what was the avergae number of people that visitied the theme park daily in 2022).

From Orlin:

  • What’s the goal?
    • Each answer is a number. You’ll guess a range of values. trying to make it as narrow as possible while still including the true answer.
  • What are the rules?
    • One player — the judge for the round — announces the trivia question. The other players act as guessers, each secretly writing down a range of values.
    • When everyone has committed their answer to paper, the guesses are revealed. The goal is to capture the true value, while keeping your range as narrow as possible.
    • The judge reveals the true answer. Anyone who missed the answer- no matter how painfully close they came-receives 0 points. Instead, the judge receives 1 point per wrong guess, as a reward.
    • Then, among the players with the correct answer, order them from the narrowest range (i.e., most impressive guess) to the widest range (i.e. least impressive guess.)
    • These players receive 1 point per guesser that they beat. Note they all beat anyone who missed the answer
    • Play enough rounds so that each person has an equal number of turns as judge. In the end, whoever has the most points is the winner.

Games of Information

  • Bullseyes and Close Calls


    Under the name Mastermind, this became one of the biggest board games of the 1970s, selling as many units as The Godfather sold tickets (about 50 million, if you’re keeping score). But the game didn’t begin with those colorful plastic pegs. For a century beforehand, it was played using pen and paper, under the earthy name Bulls and Cows. Now, as an ardent bovine feminist, I reject the idea that bulls are better than cows, so I’ve renamed the former as Bullseyes and the latter as Close Calls. But feel free to use whatever words you wish. This code game, under any code name, remains a stone-code classic.

    [Kris: I’ve recommended Mastermind before. See Fun Ways To Teach Your Kids Encryption]


    Because life is a hunt for information, and humans are lazy hunters. You know this already. Either you’re human yourself, or you’re conversant enough in human culture to enjoy human books like this one. Either way, you’ve seen Homo sapiens spend hours gorging on information, then somehow emerge from the feast without an ounce of nourishment.

    Take a wretched and typical specimen: me. I subscribe to 77 podcasts, follow 600 people on Twitter, and long ago maxed out the number of open in my Wikipedia phone app. Given all this information, how informed am I? The other day my young daughter picked up a pinecone. “That’s a pinecone,” I volunteered. “It comes from a pine tree. It’s… some kind of big seed, I think?” This wasn’t a tough pitch to hit. My daughter had not picked up a quasar, a Tom Stoppard play, or the hard problem of consciousness. The truth about pinecones is definitely out there. I just didn’t know it. Nine words in, I had exhausted my knowledge.

    As a rule, humans don’t seek information in the right places. In a classic psychology study, subjects were shown four cards, each with a letter on one side and a number on the other. Then they learned a rule: A card with a vowel must also have an even number.

    The question: Which cards do you need to flip over to see if the rule has been violated?

    notion image

    Before reading further, think it over. What would you flip? If you prefer to copy off of other people’s homework, here are the most common answers from a typical iteration of the study, conducted in 1971:

    notion image

    See the notes if you want to the answer and the reasoning behind it.

  • Caveat Emptor AN AUCTION GAME

    I’m afraid I can’t teach you how to win at Caveat Emptor. But I can easily tell you the best way to lose: Just win every auction. I mean it. Play a few rounds, and you’ll find that overbidding is all too common. It’s a game marked by Pyrrhic victories, with winners forced to take home prizes for more than they’re worth. This phenomenon-losing your shirt on a winning bid is so pervasive that auction economists have dubbed it “the winner’s curse.”

    Lucky for you, Caveat Emptor offers a lot more information than the typical auction. Will that be enough for you to escape the curse?

    [Kris: See the notes for how to play and why it matters including under which conditions you’d expect to find a “winner’s curse”.

    It also reminded me of Recipe For Overpaying where I note investor Chris Schindler’s intuitive explanation for why high volatility assets exhibit lower forward returns: a large dispersion of opinion leads to overpaying. He points to private markets where you cannot short a company. The most optimistic opinion of a company’s prospects will set the price.

    Fyi, back in 2000 SIG issued all new hires a copy of Prof. Richard Thaler’s Winner’s Curse]

🔗My notes to Math Games With Bad Drawings

💗Give some love to author Ben Orlin — buy the book (I don’t know Ben and this is not even an affiliate link)

Money Angle

  • 15 Ideas From Morgan Housel’s Interview with Tim Ferriss (31 min read)

    This was a great interview from last summer but the content is evergreen. These were my favorite excerpts.

  • Portfolio Theory In The Wild: Funding YouTube Creators (11 min read)

    Business Breakdowns host Ali Hamed interviewed Spotter founder Aaron DeBevoise. Spotter is a private company that provides knowledge and capital to YouTube creators including MrBeast.

    I “spotted” 2 great examples of “portfolio theory in the wild”. I relate them back to where I’ve covered these ideas before and their implication.

Money Angle For Masochists

I introduced masochism posts in January as a separate section (in the past regular Money Angle posts would just veer into masochism without warning — thanks to readers for asking for a street sign).

The “masochism” title is a self-dig because the point is actually to bootstrap the logic of challenging financial concepts with broadly accessible intuition slowly and socratically. I will resume that practice after summer break. If you are interested in catching up:

Commentary or Qualitative Reasoning

Quantitative Reasoning

Socratic Tutorial

Stay groovy ☮️