Moontower #117

Well hello friends.

It’s been 2 months. Last you heard from me, I was hanging out in the DFW area. We continued on to the Dominican Republic and then NYC/NJ before getting back to the Bay Area for the start of school. Thanks for the patience. We are all awash in “content” so I figure nobody missed me that much especially since I was still tweeting promiscuously.

After 10 weeks on the road, I was craving the warm embrace of a routine. Before I could ease back into a schedule I needed to indulge my organizational OCD otherwise known as “procrastination”. So to transition back into a weekly cadence I’ll briefly talk about this housekeeping before talking about what will change about the Moontower letter and what will stay the same.

Health

I aggressively shed the few extra pounds I put on this summer. Mostly through diet but I got back to lifting 2x/week and walking more (taking kids to and from school by foot helps there). I also got a physical/bloodwork. I was told to lower my blood pressure and blood sugar. Luckily, the Rx for both is the same — treat your body like you only get one. Feed it actual food, move it, and rest it.

Intellectual Inputs

You’d think that I did a lot of reading on my travels. You’d be wrong. I did what I couldn’t the prior summer — I hung out with family, old friends, and new friends I’ve met because electrons are amazing. But I want to get back to reading more. I don’t even mean books necessarily. Articles and blog posts are a step up from where I’ve been. I seriously starved myself of intellectual stimulation this summer. I opened my laptop maybe once a week and mostly used the Notion app on my phone to queue my reading list. I started working through it this week. Here’s a look at my queue system in case you are a serial killer too.

Filing system for reading

For better or worse, filing posts I want to read makes me feel less overwhelmed. Posts that are long or technical require different energy than the “<8 min read” and my Notion dashboard is a useful triage. And it’s fine to discard something you thought you might want to read and later lost the will or need. To get reading times I use the ReadingTime Chrome extension (link).

The “Week of 9/7/2021” is a dropdown where I file the articles I read this week. At the start of the next week, I’ll move that file to the “Weekly Reading Archive”. Sometimes, I’ll read something and want to refer back to it but I didn’t anticipate ever wanting to refer back to it but I might remember roughly when I read it (ie “during Thanksgiving last year”, or “when I was in LA”). This gives me a chance of recovering it even if I can’t remember distinguishing features of the post to feed a search engine.

Other sources of media

I just have a simple list by media type (ie movie, YouTube clip, etc). For audio sources, I use PlayerFM to queue podcasts and Spotify to explore music. My public Spotify lists are indexed for you here.

Courses

Separately, a college bud recently needed to re-arrange an equation for a financial model he was working on. He put it on our group chat that has several electrical engineers and physics folks with advanced degrees. Crickets. I stuck it into an online math solver after taking a crack at it and failing. The solver reminded me that there’s a general formula for a quadratic equation that starts with:

-b ± √ stuff

Oh, the cobwebs. Use it or lose it.

Anyway, that feeling prompted this tweet that led to a treasure trove.

Twitter avatar for @KrisAbdelmessihKris @KrisAbdelmessih

Please reply with your favorite free online algebra, calculus, stats courses please. 🧮

I rummaged through the responses and came up with this shortlist if interested:

And of course, Khan Academy was a frequent recommendation.

The Future Of Moontower Weekly Musings

  • You may have noticed Moontower has migrated from Mailchimp to Substack. Mailchimp’s free tier caps at 2k subs and there are now over 2,100 of you. Meanwhile, Substack is always free. And so easy a caveman can do it, lucky for me.
  • I moved the archive (in a painful copy/paste process) to my WordPress site MoontowerMeta.

After >2 years of following a steady format, I’m modifying the letter. How will Moontower be different?

  • It will be much shorter
  • It will be more focused on sharing links I found interesting
  • It will only have 2 sections. The main section is where you will find recommendations and Money Angle is where you will find more finance-focused links.

What will not change?

  • Sunday is the day. Every week.
  • It will remain personal. A lot of reader outreach came from the philosophical and productivity-geared posts. The From My Actual Life section also created an easy relationship with you. So even though the Money Angle drives the subs, this outlet where we try to figure out life together I think becomes the familiar friend. It means a lot to me but removing the weekly prompts reduces the mental overhead of the letter.

This brings me to the reason for modifying the letter — to reduce the hours I spend on it. I want to tackle a list of writing projects and posts that require more effort. I’m just re-allocating time from the letter to the longer posts (which I will of course share in the letter as they get published). When I started Moontower, it was intended to be just links, but your encouragement let me wade into writing. Both the finance and life writing found appreciative audiences once I hit “send” on Sunday. I’m just leaning into that, so 117 letters later, Moontower is coming full circle and going back to mostly links.

Ok, this is already much too long so we will punt on Money Angle this week and just share a few recs/tweets from the past couple of months.

Recs

  • Motivational books…I compiled the results here.

  • Investing in future productivity

    The 8-year-old has been using typingclub.com to speed up. He noticed I peck like a chicken and shamed me into practicing. Jeff introduced me to an even slicker software — keybr.com. Painful but it will be worthwhile. (Yinh, meanwhile, is a ringer and organized a wpm contest at her old firm on her last day and torched everyone. She’s close to 100 wpm. Annualize that.)

  • Fun
    • I saw Ford vs Ferrari for the first time this summer and it immediately became one of my favorite movies. I watched it 4x in a week which reminded me of my early 20s when I first got a DVD player and watched LebowskiZoolanderBoiler Room and Any Given Sunday until I just about wore the discs out.
    • I went to Bottlerock for the first time ever. It was like a food and wine festival with music. It was well-done and comfortable. Nicest port-o-potties I’ve ever seen. And no lines! We went general admission and used car service to go back and forth each of the 3 days (even Best Westerns were about $1500/n for double occupancy). I’d go back to Bottlerock but maybe book accommodations a year in advance.

      Favorite new-to-me discoveries: The Black PumasJoywave, and Cage The Elephant (who are on binge repeat mode in the house now. I made a playlist of the set they played if you wanna partake).

    • I was looking for literal moontowers when I was in Texas this summer so let it be clear that I’m totally biased when I say you need to listen to the audiobook for Greenlights.

    Thanks for reading!

Moontower #115

Friends,

Last week I shared The “R” Word.

The post was about trying to reframe a career in a sustainable way. In a way that aligns with how our idiosyncratic energies work. Aligned with the types of people we want to be around.

The largest payoff to this isn’t immediately obvious. It relieves the pressure to build a nest egg with an overengineered margin of error. Instead of relying on assumptions of things that are out of your control like returns and inflation you choose to rely on your human capital.

The key is that you will still be excited to employ your ability and the returns that come from being a willing perma-learner. You won’t have a strong desire to stop working since you chose a stroll that forgives you for meandering instead of a sprint. A sprint taxes you not just physically, but mentally, by making you think there’s only one way to win. Racing is insidiously expensive because it directs your gaze to a finish line. A bizarre approach to life, since tomorrow is never guaranteed.

The post led to many responses (it’s the most reactions I’ve gotten from a post, especially as a percentage of total views). Many of you are thinking deeply about the same topic. I’ve had a few young people respond. I am impressed at how deliberate they are about their long-term strategy. I was never that mature. Unsurprisingly, most of the responses came from finance/trading folks of similar age as me. Many extremely financially successful or downright rich. Some of them have been sick of their profession for years but in the absence of a roadmap can’t pry themselves away from stacking more chips.

I keep thinking about this. I keep coming back to a half-baked thought but I’ll blurt it out and you can finish it in your own oven. It could be a wasteful or irresponsible thought. Or it can unlock more thoughts and break inertia. I take zero responsibility, blame, or credit for what you do with it.

You will never walk away from money without a reason. But money is not fungible with risk. Actually it’s a risk-absorber. For many, the feeling of a life well-lived requires risk. If you accumulated more money than you need, you have sterilized a lot of risk. And you’ve sterilized the feeling of being alive. There are many types of risky pursuits. Some are fun but not meaningful. Some are meaningful but not fun. And everything in between.

Before making any changes to your life think about:

  • The size of risk you need to feel engaged
  • The nature of the risk you need (where is it on the fun/meaningful spectrum?)  

With the answers to these questions, you will know whether you just need a new hobby…or if you need “a man to come through the door with a gun”.

Finally, I’ll point you to 2 terrific related posts that have lingered for me.

  • The Path (5 min read)
    Chris Wong

    Excerpt with my emphasis:

    For me, The Path started when I began my career in finance in 2002. Actually, I’ve probably been on The Path even longer, since middle school. Get good grades, get on the honors track, do extracurriculars. Get into a good college. Get a good job. Get promoted. Get a better job. Get promoted. Get a better job. Get promoted.By the time I turned thirty, I had begun to question The Path.

    The real reasons were that the money was good and The Path was a siren’s call to a life of comfort. The money to me was security and optionality. But I wasn’t using the optionality to do anything and because I had already stopped spending money on things I didn’t enjoy, I had a degree of financial security. Why be inauthentic to myself in order to pursue goals that didn’t interest me? In finance, the answer to the interview question “Why do you want this job?” is a dirty open secret. You are not allowed to say money. Even though that is everyone’s real answer. You must make up an answer to prove that you are not a masochistic psychopath. I couldn’t lie anymore. The only reason to stay in this job was money, but to me cash was the applause of Performance Art and I would rather put on my own show in an empty theater.

  • Speculation: A Game You Can’t Win (More To That)
    Lawrence Yeo

    Risk aversion is the idea that a loss of X hurts more than the joy of winning X. That means the profession of investing has an emotional volatility drain that wears us down. This short post will similarly resonate with traders. If you are not a trader and it resonates, I’d suggest you are misallocating your time.

    Excerpt from Lawrence’s post:

    …financial freedom isn’t about money, it’s about attention. The less you have to think about money, the more free you actually are. Speculation is the antithesis of that statement.

    Read the whole post here.


The Money Angle

I’ve talked about compensation deals in the past.

For example, one of the tweets in this thread:

Anyone that has ever worked in derivs or at a mm knows what a beast comp negotiation can be. There’s a trader on both sides of the table. Both sides are pricing calls and puts, netting risks, and trying to find structures that work for both sides’ risk preferences.

In On #Voltwit Melees I wrote:

If you really want to examine incentives, think about the PMs at the fund. The non-equity owners want maximum vol since their downside is just losing their job, but their upside is a percent of their performance. Their equity-owning counterparts want the assets to stick. Notice how the non-equity-owning PM has the same incentive as the LP, not the GP.

Comp structures, just like fee structures, are about shifting incentives to create alignment. But there’s a lot of haggling under the hood that looks an awful lot like options trading. When you negotiate comp, do you ever wonder who the patsy is? Or do you think you are in the ballpark of fair value AFTER considering all the levers/scenarios?

Recently, a friend reached out for advice about a specific type of situation. I see a concern that is worth sharing more widely. A bit of background first:

The friend is a senior employee. They are not too concerned about the downside of the new opportunity they are looking at (meaning if they just earned their salary and no bonus they could tolerate that outcome…salaries tend to be a small percentage of total comp for senior employees). The friend is really interested in the opportunity for the upside so, in trader parlance, the friend wants maximum call exposure and doesn’t value the put (ie a minimum guaranteed bonus) much. I have found that employers can be flexible on these structures. If you are risk-averse they are willing to give higher minimum bonuses but take your upside. Of course, on the trading or fund management side, employees are usually in it for the big payoff so do not choose this option, especially if they have savings and can survive on their salary alone if needed.

The major points to be aware of:

  • This friend wants max upside and is not concerned about the downside of the opportunity they are considering. In fact, the friend would be taking a substantial paycut for the shot to have large exposure to the new gig’s success.
  • The nature of the gig is the friend would be launching a fund that had an AUM fee but no performance fee (it’s not a hedge fund) and the fund would be closer to systematic than discretionary.
  • The friend is focused on how to ensure they are aligned with the employer in the case that the venture succeeds.

That’s going to be tricky. Can you anticipate my warning?

Here’s what I told my friend:

You are willing to accept a large carrot on the back end to take risk on the front end. The prospective employer agrees in principle to that arrangement. If possible, the gold standard of alignment will be tying your stock awards to a trail of your efforts in the building of the new product.

The correct appearance of the trail is that it should look overly generous to you in the event that it “hits”. Remember, you took a paycut and a risk upfront. The real-time value of that trail cannot simply be weighed against your real-time efforts since the trail is a lagging indicator of your work.

You are being very clear that your situation allows you to take a risk but it’s critical that you get paid off if things work out. There is always a form of “credit risk” when structuring a deal like this in the sense that at many winning positive scenarios, on a forward-looking basis, it will always look like the right play for the employer to cut you. You are addressing this ahead of time, and want the employer to assure against the incentives it will have AFTER you have borne the bulk of the risk.

What safeguards are in place to “remember how this deal was supposed to work”?

At every review, owners can exercise the option to screw you. Insuring against that is pretty difficult. A big difference between startups and fund management is that early startup employees own true equity. This reality is harshest when things go well. I suspect some market-making firms (they are not funds but the analogy holds) could have paid every employee millions of dollars last year and still had record profits. But they didn’t. People were paid well but found out they had zero delta to the upside at some threshold.

I’m sympathetic to their employer as well. If you paid everyone what they “deserved” many would have quit having hit their FU number. And if you don’t, sure some might rage-quit, but there’s not some other employer willing to pay them more based on some outlier year. Most likely, the owners will admit to themselves, that ownership has its privileges and they are the risk-takers. An unhappy employee is free to start their own business. In fact, that’s who entrepreneurs often are…people with chips on their shoulders.

Ownership is the only true call option. Not shadow equity, where you are promised a percentage of the p/l. That’s not a stake that you can cash out to partners.

If you are in the game for upside, be careful about who writes your checks.

(Option traders know the warning well. Bonus season, despite its moniker, rarely feels like bonus-y fun. Reviews are mostly endurance tests in which you restrain yourself from flipping a desk as you read a disappointing number off a page, several times until it finally registers that it’s what was indeed intended, all the while a superior gaslights you about how good a job you did. The canyon between words and actions so wide, you might even look around to see if there’s someone else in the room. But no. They are actually talking to you.

Market-making firms are generally run by ruthless Ayn Rand worshippers. Whether they converge to this mindset as a post-hoc rationalization for their role in doing “god’s work” or start with it likely varies. I suspect it takes a certain type of person to get to the top of that profession. That person will be good at rationalizing and see wealth as evidence of being right. It’s all quite convenient.)


Last Call

My friend Matt has been developing an app. He’s looking for testers. I’m going to do it. Here’s the pitch, if you are interested please sign up!

Years ago, I fell into the habit of letting work encroach too much on my personal goals – being a great dad, friend, husband; pursuing hobbies; staying in shape.

So I tried to achieve balance by working with coaches, and immersing myself in relevant content. What emerged was Whee.li – a system and app to help me intentionally apply a growth mindset across all the dimensions of my life. I have used and refined Whee.li for years with great results.

It’s time to share it more broadly …

Through July 10, I’m accepting applications for individuals interested in testing Whee.li. The application is quick, and the beta program will start in August or September. The commitment is five weeks, fifteen minutes per week.

If you are interested, please apply at www.whee.li. If you know people who would be enthusiastic testers, I encourage you to spread the word.

Thanks for your support!


From my actual life 

Earlier this week we went to Disneyworld in Florida. A few observations and tips:
  • We stayed at the Yacht Club. It’s considered one of the mid-tier Disney properties but we thought it was plenty nice. We chose it because it has the best pool. It didn’t disappoint. There’s a great water slide that starts in the crow’s nest of a pirate ship and takes you down to a 4′ deep pool. It’s fun for adults and kids probably as young as 3 or 4 (if they can’t swim you can catch them at the bottom). The staff coordinates activities for kids in the pool, there’s water volleyball, a lazy river, a whirpool with a strong current that’s fun to try to swim against, and many pools with sandy bottoms! Toddlers and younger children will especially love the kiddie pool/beach section.
  • The Magic Kingdom is still not doing fireworks or outdoor shows which is strange (Yinh was up late one night though and did see a practice fireworks show after midnight). The park is crowded and nobody is masking so I presume operations will go back to normal soon. Except the new idea of mobile ordering. More than half the concession and food options have no lines because mobile ordering is mandatory at those spots. I suspect that trend is staying. Between using the app in the park, mobile ordering, and taking pictures make sure you have enough phone battery. Oh yea, I discovered a frozen dessert called a Dole Whip. For $5 it’s the best deal in the park (although I recommend the vanilla soft-serve that you can find at the same stands. Perfection.).
  • The best rides in the Animal Kingdom are the Expedition Everest rollercoaster (the Yeti theme and surprises are awesome) and the Avatar: Flight of Passage ride. I thought that ride was exceptional and in the running for best ride overall. If the line wasn’t so long, I’d have gone again.
  • My favorite park of the 3 we visited was Hollywood Studios. The Star Wars section is called Galaxy’s Edge and is an unbelievable re-creation of places from the movies. The attention to detail hurt my brain. Total devotion to quality. The kids especially loved the Millenium Falcon ride called Smuggler’s Run. It’s interactive as everyone plays the role of either pilot, gunner, or engineer. But the show-stealer is the 18-minute experience called Rise of The Resistance. You must reserve one of the limited spots and the ride is very popular. I’ll pass along the tips we learned to ensure we’d get in. Call customer service on the Disney app to link the app accounts for all the adults in your party. This process took about 2 hours the night before (mostly just sitting on hold). Then have everyone in your party ready to snipe the “virtual queue” on the app when they start accepting people (just like trying to snipe concert tickets when they go on sale). 5 of us sniped at the same time, anticipating as the clock turned from 6:59 to 7:00 am.

    Finally, if you want a chance to grab a drink in the Cantina bar make a reservation. They book 2 to 3 months out. We didn’t know about this. Next time.

  • I learned that when my kids are scared on rides they keep repeating with utter calm and monotone “I hate everything about this”. Then when it’s over they claim it was their favorite. Psychopaths.

Today, we are in the Dallas area for the next few weeks crashing with close friends. We lived near each other in NYC and amazingly in the Bay Area as well. Now they are making a full-court press to have us move to TX. I don’t know, it’s pretty hot here. They are targeting my vanity and weakness for frivolous beverages. Never a bad strategy to be honest.

Moontower #113

Friends,

Hello from Jupiter, FL where I am meeting my east coast family for an overdue reunion. As I mentioned, letters will be shorter as I’l be more offline during this summer’s adventures.

I did publish a single post this week. It starts…

Collecting options is freedom. Freedom is the most revered American ideal. In an orgasm of deductive logic, flowing straight from that idea is most Americans’ prized ambition — “financial freedom”. Sparkling with alliteration, the phrase has led countless dreamers to spend weekends at conferences learning the latest fashion for deriving “passive income”. I’m not judging this goal. To some extent, we all have it in some form. But be honest. When someone uses this phrase earnestly, you kind of want to die of boredom.

…continue reading The Options Cage (12 min read)


The Money Angle

A friend asked for some recommendations.

My nephew is 16 and wants to “get rich in the stock market”. He knows nothing. Is decent at school/math. I want to send him five books. He probably won’t have the patience for stuff that is too dry or dense.

My response:

I think it’s helpful to get a glossary understanding of concepts in the first place. Khan Academy is great for that. Of course that it just to explain terms but my book recs would have more to do with think of the markets as competitive games with prices as point spreads.

To that end my recs for core reading:

  • The Most Important Thing by Howard Marks
  • Fooled By Randomness by Nassim Taleb
  • The Psychology of Money by Morgan Housel
  • 4 Pillars of Investing by William Bernstein
  • We both agreed Moneyball by Michael Lewis fits beautifully in this context so that would round out the list.

For a bit more advanced I’d recommend:

  • The Little Book That Beats The Market by Joel Greenblatt

    The reason this book is great besides being short is that it a hands-on demonstration of how to have a process and marries understanding core business math with an investing process (sorting, filtering, measuring and normalizing). There’s many implementations of the strategy floating around the web with modifications so if he wants to dig there’s plenty of fertile soil. While the vanilla strategy is mined into oblivion at this point, the real objective is to understand the process because that’s universal and applies to trading as well as investing. It’s a mental template.

  • The Accounting Game: Basic Accounting Fresh from the Lemonade Stand by Darrell Mullis and Judith Orloff

    I read this a few years ago and it’s a hand-on, easy way to learn the basics of accounting. It explains how balance sheets, income statements, and cash flow statements interconnect. It describes how you book items and the tradeoffs involved. It helped me appreciate how much judgement is actually included in accounting as well as how you can tell different stories with the way you choose to do accounting. Accounting feels like a subject I’d enjoy which is a sentence I never thought I’d say. I took my own notes here.

For my other collections see:


Last Call

  • There Is Beauty In Fundamentals (Link)
    Lily Francus

    Different minds approach math differently. Find out what kind of mind you have and why math education should look less like a ladder and more like a “radiating umbrella”. I think my brain is closer to Lilly’s type except you can probably fit all of my folds in just one of hers.

  • The 10 Essential Strategies for Deeper Learning (Link)
    Scott H. Young

    In case you want to get back to learning these are outstanding recommendations. Knowing how to study is a skill. Scott’s blog is a treasure for learning about learning (I often share links from it in Moontower).

    #10 was always my issue with school. If interested check out my own musing We Don’t Need No Education.

Moontower #112

Greetings from Tahoe!

My family is traveling for 2 months and this is our first stop. I will be online much less than usual if the past week is any indication. My total computer screen time was about an hour. Expect more blurbs, less long posts, and shorter Moontowers this summer.

Here’s a few things I’ve enjoyed recently that cultivate a mindset that counteracts the trader residue I narrowly described in How I Misapplied My Trader Mindset To Investing:

  • Liminal Warmth 

    I came across this blog via the Twitter account @liminal_warmth. I was deep into several posts that grabbed my attention. There are lots of essays so I reached out to ask for which posts LW recommends. And voila, this thread will get you started.

    LW lives their own divergent script so it’s not surprising that the writing is unique and provocative. In addition to living in a van in a desert and writing tons of fiction, LW is a solopreneur/freelancer with tons of hard and soft skills for hire.

    I’ll single out an excerpt I found resonant from The Weirdness of Becoming Attractive in Your 30s (Link):

    Weirdly enough developing more empathy and more compassion and listening more and being more respectful of other people started working its way into my feelings toward myself… and I started hating who I was a little less. And I realized for the first time that attraction is as much about how you make other people feel as how you look (and arguably much more important). This completed a puzzle piece in my communication style that had always been missing. And it was so weird because I suddenly had this massive wave of empathy for everyone around me and I wanted everyone to feel special and pretty and liked because I knew how much it hurt to not feel that way. So again, I spent more time being actively interested in other people and trying to make them feel good and got more feedback loop results where I got positive attention in response and I felt amazing that I was able to make other people feel good and happy too.

    There’s nothing more addicting than watching people believe in themselves. Just observe a kid that learned to ride a bike or swim. I have a saying that compliments are the cheapest source of capital. Not in a fake or hollow way. But when someone is just doing their thing and you notice it’s awesome, even if it’s not grandly remarkable, just tell them. It unlocks people in a way that everyone wins.

  • The Scarcity Struggle (essay)
    @NeckarValue

    This post is an outstanding reference for battling a zero-sum mindset. It chronicles the author’s own journey but many of you will be able to relate. It’s much better than my own writing on the topic so I will just leave you to read it.

    It reminds me a hack we use around our house: “You can’t be negative when you are in state of gratitude”. You are the object of someone else’s envy for one reason or another. Everyone is dust eventually. No point in doing anyone else but you.


The Money Angle

If “high” was expensive and “low” was cheap then trading would be easy. I’ve discussed this tension in:

I was recently asked the following question:

Hey Kris, got a beginner question for you if you have some time. Why do people recommend selling ATM spreads instead of slight OTM? If there’s a smile, it seems to make sense to sell the higher IV wing.

Re-stated more generally, the question is:

Why would I ever buy a higher IV or “skewed” option to sell a lower IV option?

You can get into a long discussions about greeks, liquidity, jump probabilities, distributions and their moments, and spot-vol correlations. They will all lead you back to the idea that “high IV” doesn’t mean expensive IV. It’s not an encouraging answer if you are looking for simplicity.

But let me offer a constructive perspective to help you along.

It’s not hard to understand why skew exists in option markets:

  • supply/demand of risk (ie hedging and overwriting flows)
  • correlations increasing when risk premiums expand (here’s my thread on dispersion)
  • fundamentally, a stock is more levered when it’s equity value falls

In addition to those, I’m sure there are technical (ie lots of math) reasons involving jump models and higher statistical moments. I’m not smart enough for that. Many option traders probably aren’t. But one of the ways to survive/thrive is to take a more intuitive approach.

The logic flows as follows:

  1. Markets are pretty smart. It’s naive to think “high” equals expensive.
  2. Implied vols are a useful ruler for comparing vols but I can’t read too much into them as valuation tools since the underlying distributions are unknowable.
  3. Market prices contain extra intelligence or assumptions about a stock’s distribution but Black-Scholes assumes a singular distribution leading to differential implied vols. (Those differences are a fudge because we are standardizing the underlying distribution, even though we know the market is capable of handicapping a multitude of conditional distributions.)
  4. Focus on relative pricing to make your process less model-dependent. This lets the model errors “cancel out”.

Here’s an example of this relative thinking that I explained to the learner:

Suppose I found 20 reasonably correlated names that all have skews more expensive that at-the-money IV. If you sorted the skewed options as a percent of ATM vol there would be a top half and bottom half of expensiveness. But if you looked at just the cheapest one naively in isolation you would want to sell the skewed option. But zoomed out in a cross sectional view you would have wanted to buy it.

If you are only trading one name you are in the domain of my post Structuring Directional Option Trades. In this case your fundamental analysis is upstream of your option trade expression. So be careful about mixing up vol trading which requires a zoomed out lens and directional options trading which requires a deep  understanding of a single name’s distribution (see Real Talk On Options Trading).

A possible compromise between the approaches is to look at a time series of the skew relative to ATM to see if it’s low end or high end of normal. This will still deceive you in cases when all the skews in the market converge. For example when all skews in the market are “high”, if you look at your name in isolation you still won’t know if it’s relatively “high”. A proper cross-sectional method will benchmark to a liquid name or basket that can be considered “fair”.

So that’s 3 lenses. Cross sectional, fundamental, and time series. It would be nice if your trade idea looked good on a all 3 filters, but option traders usually have limited visibility into fundamentals so it’s too high a bar for pulling a trigger.

How can option traders make up for that incomplete picture? The same way poker players use betting patterns to narrow a hand.

Here’s a clue:


Last Call

On the drive up to Tahoe, Yinh had me listen to her latest obsession. The Smartless podcast. It’s hosted by Jason Bateman, Will Arnett, and Sean Hayes. The setup is fun. Each episode, one of the hosts surprises the other two with a guest from their Rolodex. All three episodes I listened to were great — Tina Fey, Julia Louis-Dreyfus, and Mitch Hurwitz (creator of Arrested Development). The podcast has amazing behind-the-scenes energy and you pick up many nuggets about how showbiz works. As you might expect, these hosts’ ability to riff on their feet is other level compared to most pods.

Listen at Smartless

I’ll leave you with one of Arnett’s throw-away comments:

“Life is all vibration. You get back what you put out there.”

Moontower #111

Friends,

This week I published the 3rd and final post in a series of recent reflections based on what I am seeing around me in financial markets and my own blindspots. I’ve been overwhelmed by the response to them especially since they have a combined reading time of 45 minutes.

The final post is entitled Talking To Diamond Hands. The message is a simple but heavy idea: risk is deeply personal.

What you’ll find:

  • How finance brains think of risk and how it can make them narrow-minded.
  • How wide a range there is how normal people think of risk.
  • A script for finance people to help normal people clarify the difference between risk and their investment thesis.
  • How an empathetic approach to seemingly insane risk management can teach you about what people really desire.
  • Setting personal goals. You are not your neighbor.
  • And of course a description of risk management approaches that match your goals.

Many, if not most, of the diamond hands crowd don’t understand risk. But many “risk” professionals fail to recognize that risk in its most abstract sense is the possibility of not meeting your goals. The practice of risk management is a set of tools to tack a course to a goal. But goals vary widely, so what’s risky depends on what the final destination is. Divergent goals, demand divergent strategies. The risk professional’s expertise (I’m picturing Ben Stiller’s character in Along Came Polly right now) is not really what you need.

You need self-awareness.

You must be intentional in your goals. They are yours alone. Even if those goals are grandeur (or “thymos”). The line between recklessness and chasing a dream depends on how honest you are with yourself and your family. Own your goals so you can strategize for them. Own your risks so you can have a chance.

To read the full post, continue to Talking To Diamond Hands (22 min read)


If you missed the first 2 posts, you can find them below.

1. Why Investing Feels Like Astrology (19 min read)

2. How I Misapplied My Trader Mindset To Investing (14 min read)


The Money Angle

The corner of finance Twitter or #fintwit that is concerned with options (#voltwit) is a melee lately. There’s passive aggression in the form of subtweets and outright battles on people’s timelines. I won’t re-hash the feuds but there are 2 categories of accounts catching heat:

  1. Clever sounding accounts with weak track records

    They are accused of being marketers without substance to back it up. It’s the “podcast-appearances-as-contra-indicator” effect. If those with edge stay quiet, the silver-tongued must be imposters. Of course, the asset management business is not this cut-and-dry (Twitter Spaces would actually be a fun venue to dissect why this is a grey area if anybody wants to tackle it). There are good reasons why genuinely strong managers talk. But also, a weak manager that may have been lucky might not talk. So the podcast-hopper can be the real deal, and the podcast non-hopper can be hiding, content to profit from their own private, captive audience.

  2. People whose followings dwarf their accomplishments

    Some of this stems from people being haters (or worse…there is some terrible behavior out there). Some it stems from people who have hard-earned reputations feeling like their craft is being diluted or sullied by imposters. It reminds me of “Batesian” mimicry in nature. The harmless Kingsnake mimics the colors of the venomous coral snake as a form of defense. It can fool many predators…except the real coral snake itself. Game recognizes game. And game also recognizes not game.

A few thoughts about this:

  • Some of the malice has been fired at young people who are outspoken and trying to build businesses but are also upfront about their lack of relative experience. The rules of engagement about what is out of bounds and what isn’t is self-regulating by bystanders. The crowd is the arbiter of decency. This is probably the strongest reminder I had of the trading pits and I didn’t even include it in my post Twitter Reminds Me Of The Trading PitsOn the trading floor, there were exchange rules just as Twitter has user policies, but there is lots of latitude within the rules that are governed by social norms and enforced by the community.
  • For people that are using social media to grow their influence, they risk living and dying by the sword. Furthermore, I think most pros would tell you that the conversion rate of influence to institutional money is close to zero. Retail is different, but still, the verdict is out on the ROI of social efforts and in what segments it might be more effective. I suspect it’s far more effective in say self-storage syndication (the irony of using Moontower as a subtweet in a discussion of subtweets IS why you’re here right?) than raising money for a factor ETF.
  • Benchmarking a track record in the options world is tricky. The vol community is not homogeneous. There are long vol funds, risk premia funds, over-writing strategies, tail funds, and absolute return or vol arbitrage funds. In addition, the bulk of the capital in the vol trading space is held by private market-making firms like Citadel Securities, SIG, and Jane Street.

With that context, here’s a few related links:

  • Chris Cole Explains How To Build A Portfolio That Outperforms For 100 Years (podcast)
    Bloomberg Odd Lots

    3 key ideas:

    1. “Prepare not predict”

    You don’t know what the future holds, so you should diversify for all weather

    2. The recency bias in almost all investing advice you see today

    The conventional wisdom in the US would look nothing like what the Japanese believe. Sure, we might be exceptional, and there are many differences between the US and other developed nations. But if that’s your bet, at least know that you are making it and not ignoring broader base rates.

    3. Sharpe ratio is useful at the portfolio level, not individual investment level.

    He uses a powerful and correct analogy. Your portfolio is a team of complementary players (investments). If they are all scorers your team cannot win in the long-run. Long vol and long tail strategies look terrible in isolation. If you fail to appreciate the impact of convexity and correlation in portfolio construction, you don’t understand diversification. You are a baby who can’t reach the pedals. A good starting place for learners is The Diversification Imperative.

    Overall the episode is an outstanding reference. It’s one of the first places I’d point a novice who was starting to learn about portfolio construction. That said, there is one section that I (and probably other vol folk) find distracting to the whole message, but it should not lessen your view of Chris’ understanding of proper diversification. [That’s the section about back-fitting vol surfaces to extend the history of options to a time before they were listed. The purpose is to backtest a vol allocation. But since options markets are forward-looking any constructed implied vol history is doing more hand-waving than a pageant winner. Backtesting a vol allocation even with the official history is a highly speculative exercise since options markets have evolved so much. I’d have little confidence in any assumptions about liquidity and slippage to say the least.]

  • Speaking of #voltwit feuds. Here’s a well-respected but anonymous account, @quantian1, going after Chris Cole. This tweet is a doorway to a deep understanding of portfolio construction. How did it go down?

    1. Quantian called out Chris’ poor returns.

    Chris’ published returns for his stand-alone fund fall way short of how smart Chris sounds (and is). This would seem to make him a target for a seasoned anonymous account (the reason anon accounts can be extremely credible is that many employers forbid social media presences, so many professionals will not use their own names. But the ecosystem is pretty efficient at recognizing who is legit despite the alt identity. I find that anon accounts serve the same truth-finding function as short-sellers since they can speak freely).

    2. Quantian’s critique is sophisticated because Quantian understands the value of tail strategies:

    I love tail risk funds, and I love the idea of diversifying with a high-vol, convex asset. But this isn’t that! This barely has more vol than a t-bill. It’s *less* volatile than a 30-year zero. You need to allocate a *huge* chunk of capital to this to have it work. If you had a fund which was routinely posting +30%, +40% months in a crisis, and was +100% in March, then that’s absolutely worth paying 2 and 20 for a 5-10% position in. But if you’re a vol fund up a measly 150 bps in Feb of 2018? That’s not worth the price of admission. If you are selling tail risk insurance, it needs to be as capital efficient as possible to allow your investors to maximize their beta exposure elsewhere. Imagine if insurance required you to post collateral equal to half the car’s value- nobody would buy it, it’s not insurance.

    3. Chris responds head-on to Quantian’s critiques but in private. Here’s what Quantian revealed:

    Let it be known that Chris has graciously responded to my questions about vehicle structure to a sufficient degree that I consider this beef “squashed”. The fund is a small component of assets relative to SMA overlays, which are adjusted to fit the client and perform quite well

    Quantian’s “apology” is pretty on-brand:

    I do consider the willingness to engage with anonymous trolls on Twitter, many of whom live in basement apartments and drink Leoville-Las Cases because they cannot afford Latour, to be a positive characteristic in an investment manager, so he gets bonus points for that too.

    Chris has been building a brand in public for over a decade, he’s a popular speaker at vol conferences and well-respected within the industry. On the one hand, you could say what Quantian basically said: for an investment manager to indulge an “anonymous troll” is gracious. But it’s not gracious, so much as tactical. It was actually a strong move because Chris defended himself from a formidable, well-respected adversary competently. This actually makes him stronger. Going back to my first bullet about these #fintwit feuds…how many investment managers are not willing to expose themselves to the scrutiny? Live by the sword or avoid public battles altogether.

    I should call attention to a wonky extension of this discussion. It’s the importance of the tail allocation living under the same umbrella as the risk-on investments to maximize the synergies of portfolio margining. This lessens the drag of the hedge and demonstrates why vol “solutions” often make more sense than stand-alone tail funds. It’s an adjacent discussion to why you want individual managers to run their strategies at as high a vol or leverage as possible subject to prudent margin management. This is more fee efficient. Too bad many professional investors don’t understand fee math. But this principle is also important because it means that vol is best managed at the portfolio level and not the individual manager level. If there is an investment that has an annual volatility of 40% and the equivalent fund running at 20% and they have the same fee structure you should pick the 40% vol version and allocate half as much. Notice how this incentive is the mirror opposite of an asset-gathering manager — they want to run maximum diversification to keep their vol low and the assets sticky.

    [And if you really want to examine incentives, think about the PMs at the fund. The non-equity owners want maximum vol since their downside is just losing their job, but their upside is a percent of their performance. Their equity-owning counterparts want the assets to stick. Notice how the non-equity-owning PM has the same incentive as the LP, not the GP.

    Comp structures, just like fee structures, are about shifting incentives to create alignment. But there’s a lot of haggling under the hood that looks an awful lot like options trading. When you negotiate comp, do you ever wonder who the patsy is? Or do you think you are in the ballpark of fair value AFTER considering all the levers/scenarios.]


Permalink to this week’s Money Angle: On #Voltwit Melees


Last Call

A couple items that piggyback on the money topics for this week:

  • Unofficial List of The Best Deals Ever (thread)
    @TrungTPhan

    Having diamond hands is easier when the investment is illiquid and you cannot sell it. This thread lists the greatest investments returns of all time (min of $1b).

  • Corey Hoffstein Interviews Tina Lindstrom on Commodity Volatility (podcast)
    Flirting With Models

    Tina has been a friend since I joined SIG in 2000. She’s a partner at First NY where she manages their commodity volatility business (the same sandbox I’ve been in for 16 years). She shares some great trading stories (the astrologer story is a long-time favorite) and does an outstanding job explaining what it’s like to trade commodities and options.

    Follow her on Twitter: @moreproteinbars

    If you want to hear more about Tina, Yinh interviewed her in 2019 on Growth From Failure (it still stands as one of the most downloaded episodes of GFF ever).


From my actual life 

A quick note. The 3 posts I published in the past 10 days have been some of the most circulated and linked to posts I’ve written. I picked up lots of subs in the past 2 weeks. Welcome aboard and thank you for reading.

I do want to warn you, this issue was more finance-centric than usual. Everything outside of Money Angle just depends on what occurred to me that week. Here’s a categorized index of all my writing. Besides finance, I’m interested in education, productivity, music, and generally making sense of things aloud. The goal of the letter is to share insights, connect, and sometimes just get things off my chest. Don’t ever hesitate to reach out. I do my best to respond to every email subs send me.


Have a great Memorial Day.

2 ways to honor it:

  1. The “Murph” Workout

    I haven’t done this workout in a decade (sadly), but in my Crossfit days there was a Memorial Day wod called the “Murph“. It’s a hero workout named after Medal of Honor recipient, Navy SEAL Michael Murphy.

  2. The Lone Survivor by Marcus Luttrell

    The tale of Murphy’s sacrifice in Afghanistan is documented in the movie The Lone Survivor. I enjoyed the movie, but the book it’s based on of the same title is one of my all-time favorites. It also opened a rabbit hole into the world of SEALs. Many hours of YouTube await.

Moontower #110

Friends,

I wrote 2 long posts this week. They are both about investing and I will be following them up with a 3rd that I hope to finish this week. The trio work together as a series about the meta of investing and how personal it is. You will find a description of the one I released earlier this week in today’s Money Angle.

Here I will release the second post without introduction:

How I Misapplied My Trader Mindset To Investing

Excerpt:

The four-letter version of culture is cult. You see, Susquehanna had (I’d say “has” but I am a generation removed from the firm and this post is really about me not them) a tangible culture. Today, living near Silicon Valley, culture is discussed a lot. I’ve heard it described as “what you reward and what you punish”. Susq had a distinctly strong culture, but since I was young and impressionable, I had a cultish adherence to it. The downside of a strong culture, is a weaker mind will overinternalize it. That was me. Plenty of traders were able to take the best of the culture without overgeneralizing it to life. I missed the memo to not take it too seriously.

This post is about how I misapplied the lessons of my trading career to my investing life.


he Money Angle

I published this long piece earlier this week. It’s a meta-model that wrestles with the bizarre behavior we are seeing in markets. My conclusion: markets are not absurd. Our belief in the tidiness of how markets work is absurd.

This post is superficially about the danger of believing the textbook-style investing delusion. But it offers a framework that extends the textbook views in ways that better align the objective (investing effectively) with what is required (focus on the correct inputs which are, sometimes, but rarely fundamental).

Regular readers know the tyranny of my trading experience means everything looks like an options nail.

No judgment if you turn back, but I promise no math.

If you want to discover…

  • What I call the intrinsic and extrinsic “elements of value”
  • The “bid stack” model of what element of value the marginal investor is focused on
  • Why prices responses are surprising when the marginal buyer comes from a new tranche in the stack
  • Why ignoring this framework means your betting outcomes are divorced from your rationale
  • Why textbook investing education might as well be horoscopes

…continue to Why Investing Feels Like Astrology

By the way, I have been totally flattered by the feedback for this piece, which is encouraging since it’s the longest one I’ve written since January 2020.

I won’t say who they were but 2 esteemed fund managers wrote to me and compliments are my love language so I’ll take these as a sign to keep publishing.

Testimonial 1: I have to say this was the single best thing I’ve read in *years* on the subject of markets. I’ve never seen valuation described with such a tidy bow (and humor to match). Spot On.

Testimonial 2: God damn Kris, that astrology piece was absolutely tremendous. Love how you laid it all out. The skill is putting together the mosaic, and you did that quite well. Weaved wonderfully. I’ve even sent the link to some of my PM buddies who aren’t on twitter. Was just a very fresh, and as I said, lucid, perspective on the game.


Last Call

  • Reflections On Being Asian (More To That)
    Lawrence Yeo

    I realized I was different than American kids around the same age Lawrence did and in the exact same context. For me it was pita bread. I told my mom to never pack that in my lunch again. I wanted PB&J or ham and cheese on Wonder bread.

    My favorite line in the post: “But perhaps the greatest lesson I’ve learned is that hate thrives when you do not know what people are thinking, so you assume their thoughts for them.”

  • The Hard Thing About Learning Hard Things (Link)
    Haseeb Qureshi

    Haseeb reminds us of Naval’s quote: “The world rewards you for creating things it doesn’t know how to get for itself.”

    He expands on Naval’s fortune cookie.

    In the real world, there’s no textbook or curriculum. There’s no way to practice. There’s no source of continuous feedback. There are no teachers—it’s just you and whoever you can convince to help you.So how do you learn something no one can teach you? How do you become a world-class expert on something few people understand?

    Unstructured learning requires wandering. You must poke around on your own, use trial and error, search, explore, stumble, and discover. The usual Gladwellian prescription of “10,000 hours and deliberate practice” isn’t actionable when trying to learn something that no one knows how to do.

    But this is the only kind of learning that the world cares about.

    Haseeb is a master learner and gives you 5 methods so you can be too.

    By the way, I have no idea what’s up with people named Qureshi and learning but my post We Don’t Need No Education was inspired by another Qureshi.

    Thinking of changing my kids’ names now.

  • An online marketplace for tutors that a friend recommended: Wyzant

From my actual life 

This is the last week of school for our kids. It’s reminded me of how crazy the school year has been. At the start of the year, we scrambled last minute to find them a pod teacher during the same week we decided to sell our house (which from a trading POV was a disaster. We got run right the hell over…the buzz around here this week was the house that traded for $1,200 sq/ft despite needing a new kitchen. Earlier this year I wrote $10mm is the new million and I think I was conservative. A million bucks is a rounding error in the Bay Area in 2021. It will be interesting to see how goofy things have to get for liquidity conditions to tighten up).

We are looking forward to this summer.

It’s time to see family and friends. We will be traveling for what looks like 9 straight weeks this summer to catch up with loved ones across the US. I’m especially excited for our kids who have not seen their east coast cousins since Dec 2019.

I’ll be sharing as we travel and hopefully my plans intersect with readers so I can meet some of you while on the road.

I’m aware there are people who enjoyed the smaller social calendars in the past year. I’m not one of them. I don’t need any more time with my own thoughts than I already have.

Moontower #109

Friends,

With the school year rapidly coming to a close, I was reflecting on how fortunate we were to find such an amazing woman to teach our pod comprised of our boys and two of their friends who are matched in age. I feel fortunate because this woman who we entrusted 40 hours a week of exposure to our kids was chosen on the basis of 2 hours of interviews and some reference checks. She was selected from just 4 possible candidates, sourced mostly from Care.com. There’s no way to objectively feel other than lucky.

If our odds were improved in any way, it was because of the other set of parents in our pod. I was blown away about how good they were at asking questions and reading the candidates. Yinh, who has now spent countless hours both screening and interviewing podcasts guests, felt the same. This couple is masterful in finding efficient questions to cut to the core of the candidates. It gave me so much appreciation for that skill especially when we consider the stakes.

Well, this week I came across Graham Duncan’s outstanding post about interviewing job candidates. It was one of those posts I added to my list of influential readings and re-factored for my own future reference. It’s full of practical advice but philosophically it really starts with the idea that interviewing is really a narrow application of a broader art.

From the intro:

The philosopher Kwame Appiah writes that “in life, the challenge is not so much to figure out how best to play the game; the challenge is to figure out what game you’re playing.”

When I try to figure out what game I’m playing, I see that for the last 25 years I have been playing a game of strategy applied to people, a game where over and over I try to answer the question “what’s going on here, with this human?”  In this essay, I make recommendations about candidate selection based on thousands of assessments I have made and my somewhat obsessive interest in the topic.

My goal in this essay is to help others make better decisions on a potential hire, business partner, or even life partner as quickly and as accurately as possible.  It’s made up of suggested action steps and some of the ruminations that underlie them. At the end I include my own assessment of different personality assessments and some of my go-to interview and reference questions.

My single favorite line is an idea I take seriously:

One of the greatest gifts we have for each other, for our children and spouses, for our teammates, is the positive feedback loop we can put someone into purely by believing in them, by seeing their genius and their dysfunction clearly and then helping them construct conditions for the former to flourish.

That emphasis is mine. I consider this to be one of the cheapest forms of human capital and this essay is ultimately about directing that capital.

Towards the end of the post you get a nice primer on personality tests as well as guides for conducting interviews and calling references.

Continue to my own takeaways and the link directly to Duncan’s post, Graham Duncan’s “What’s Going On Here, With This Human?” (Link)

Interviewing Engineers

I enjoyed tech founder Slava Akhmechet’s “super secret proprietary no-nonsense guide on how to interview engineers.” I am unqualified to know how valid it is, but it was fun to read. Find the full post here.

Excerpts

This guide is for interviewing very talented people.

It’s applicable if you’re building an extraordinary team at a hard technology startup. If your startup is technology-enabled, or you’re designing an interview process at a large company, or you’re hiring for well-established roles to do specialized tasks, this guide isn’t for you. You will not find references to “junior vs senior” or “front-end vs back-end” here. From the perspective of what we’re trying to accomplish, specialization is for insects.

There are three things you need to determine about a candidate: talent, judgement, and personality.

Think of hiring an engineer as if you’re buying a race car. The first thing you must look for in a race car is horsepower, because without horsepower the car is useless for racing. The horsepower of engineers is talent. Without talent, engineers are useless for building products, so it’s the first thing you must look for in a candidate. It doesn’t matter how nice the person is, or how hard-working. No horsepower, no race.Talent alone is insufficient. The world is filled with talented people who never get anywhere for a myriad reasons. Laziness, anxiety, fragility, impulsivity, egotism, victimhood, just to list a few. So once you’ve identified talent, you have to determine the shape and quality of its vessel. Where will the person direct their talent? And are they well-adapted to the demands of the external world?

Talent

  • Talent is a combination of speed, working memory, taste, knowledge of the toolchain, understanding how computers work, and ability to program. It’s IQ, but specialized for engineers. IQ is 50-80% heritable, impossible to improve, normally distributed, and strongly correlated with success in fields like science and engineering.
  • This matters for candidate selection because someone can improve within their talent band, but they can’t jump talent bands. A person with IQ of 145 (σ=3) is dramatically better than a person with IQ of 115 (σ=1). If you watch both people work, it’s like they’re from different galaxies. So your job as an interviewer is to find out the candidate’s talent band.

Judgement

  • Judgement tends to be weakly correlated with talent, and comes down to this: there is a difference between a tinkerer and an engineer. They’re close, but they aren’t the same thing. Tinkering is building a Rube Goldberg machine for the sheer delight of building it. Engineering is discovering and satisfying (often unintuitive) constraints. The tinkerer works for the machine. The engineer makes the machine work for him.
  • Most engineers aren’t tinkerers, they’re in it for the money. Don’t hire those because they have no soul and hanging around them will slowly poison your own soul by osmosis. Conversely, many tinkerers aren’t engineers. Don’t hire those either, because they’ll build beautifully complex structures that serve no purpose other than their own existence. You want people who take great delight in building Rude Goldberg machines, but balance it with a broader sense of what they’re trying to accomplish.
  • Another way of thinking about it is that talent is a combination of general aptitude and programming tactics. Judgement is programming strategy.

Personality

  • The easiest way to think about it is in terms of the big five personality traits. These are kind of like Myers Briggs, except real. The three traits you especially care about are conscientiousness, agreeableness and neuroticism. Psychologists have precise technical definitions for these terms, but in plain language you’re trying to find out (a) whether the candidate is lazy or hard working, (b) are they an asshole, and (c) are they going to be stuck in analysis paralysis and invent life emergencies for themselves all the time instead of working.
  • The bad news is that you can’t find any of this information out until after you’ve hired the candidate. You can set up a low pass filter that might trap a few bad apples, but almost everyone is on their best behavior during interviews. Personal flaws rarely come out until long after the person is working for you. My sixth sense for picking out talent and judgement is pretty good. But for personality it’s only slightly better than random. So unless you have magic powers in this area, set up a low pass filter and later fire bad personalities as they reveal themselves.

Random observation

I’ve now noticed the respect for the Big 5 Personality Traits in multiple places. They’re beloved in tech world.  Slava said the Big 5 “are kind of like Myers Briggs, except real.” Marc Andreesen focuses on ‘conscientiousness’ trait in his interview on education (my notes here). And as we saw earlier, Duncan wrote “Within psychology, it’s the equivalent of gravity, and at this point, nearly everyone in academia finds it a useful mental model for personality.”

Personally, I scored around average for neuroticism, extraversion, and openness. I scored over the 90th percentile in conscientiousness (yay, allegedly) and agreeableness. Of course, as a trader I find agreeableness to be a backhanded compliment (see my post Being a Disagreeable Investor).

At any rate, when I hear the words “Big Five” I still think of going on safari.


More useful posts on interviewing:

  • Cedric Chin’s Using Head Fake Questions To Achieve Your Career Goals (Link)
  • First Round’s 40 Favorite Interview Questions from Some of the Sharpest Folks We Know (Link)

The Money Angle

Independently Shorting Volatility with Darrin Johnson (Podcast)
Corey Hoffstein’s Flirting With Models

Darrin Johnson is an options trader and the first independent trader Corey’s had on the pod. Considering Corey’s show focuses on institutional and cutting edge investment professionals, it says a lot that he had Darrin on the show. I’m not surprised, I’ve been following Darrin on Twitter for years and impressed by his understanding of options trading. I have always believed that option trading is an apprentice activity. I cannot imagine how difficult it would be to learn the game with the guidance of masters. Darrin has managed to cobble together that guidance from a variety of sources including Euan Sinclair’s books, Twitter, hiring grad students to walk him through the academic math, running countless simulations, and detailed reconstructions of financial products.

Here are some of my favorite aspects and insights from the interview (with my commentary):

  • Darrin’s entrepreneurial path before he even found his way to trading is worthy of an interview of its own.
  • The importance of building sims instead of backtesting as a way to get more samples. For those of us who trade for firms, we benefit from the collective osmosis of many traders discussing trades and situations in detail. All those morning huddles and afternoon meetings help us build a mental library of counterfactuals. Darrin did the next best thing…build simulations, knowing that a backtest is a single version of what could happen. This is crucial to get a fingertip feel for how positions behave.
  • The idea of pricing out financial products to the penny. Darrin called it “back-office” kinda stuff that retail traders don’t do. Corey said he does this too. This is exactly what you do at a mm/arb shop. As a clerk I remember building giant spreadsheets to price fair value for ETFs. This is not optional work. You will use those skills to attack new products and understand the frictions to arbitrage.
  • At around the 40:00 minute mark Darrin explains why he concentrates his selling on at-the-money or meaty options not the wings. He makes the correct insight: when you sell tails, you need to capture the entire premium. The hit ratio of selling tails is high but when you lose you lose many multiples of the premium. If you fail to collect the full premium, it will not make up for the losing trades. The difficulty of selling tails is even trickier yet. Darrin explains how betting against longshots leaves you uncertain if you have an edge in the first place. In my words: good luck differentiating between a 50-1 shot vs a 100-1 shot. That’s the difference of 1 probability point but it’s massive in payoff space. I discuss further in Tails Explained.
  • Here’s a more subtle insight from the interview. Darrin tries to find the structure that has the best payoff to his vol forecasts or thesis. Notice the subtext. If there’s a “best” there must be a “worst”. This is the basis of relative value trading — buy the best payoff and sell the worst payoff contingent on the vol forecast coming true. For example, if you thought skew was cheap in the oil complex compared to macro backdrop, you could buy the cheapest puts across the oil and products suite. You could buy some ratio of oil puts and selling RBOB or HO puts depending on how how you think the macro stress plays out. Now you might want to be outright long the vol forecast coming true so you might not want to turn this into a basis trade (the advantage of a basis style trade is you can likely do it bigger). Or you could choose to buy oil puts and say sell puts on an equity index where the stress has been priced in. Because you’d be taking an even larger basis risk than staying within the oil complex, you would size the trade smaller than the oil basis trade, but perhaps larger than an outright long oil vol position. The point is there is a lot of creativity on trade expression that balances edge and basis risk.

Since the interview was so good, it got passed around quite a bit on Twitter. In one of the ensuing discussions, I offered my down-to-the-studs view of what options trading really is:

There’s nothing magical about options trading. Paraphrasing Darrin, the intellectuals who are drawn to it prolly need a more blue collar view. Step back and think about what the market needs. What risks doesn’t it want to hold? Obsess over the who and why, not moments [of a distribution]… For years the “job to be done” in vol was be willing to pay theta The marketplace was bidding for that role and vol folks that filled it did well. The market “bids” for different roles all the time in vol-land and the job of a vol trader is to fill it. Simple not easy.

@TheSpeculator0, who trades for a firm, astutely observes: It’s not easy to catch the regime change that switches up the roles.

My response:

That’s why risk management is key. The nature of market-making, even if you don’t explicitly have that title, is you lose on the regime change. So you adjust and hope the next regime lasts long enough to pay you for the [money-losing] transitions.

If you want a fuller discussion for the raison d’etre of vol trading, you probably won’t do better than Corey’s podcast with QVR’s Benn Eifert who describes the job as “bringing balance to the force”. I took full notes for you…Flirting With Models: Benn Eifert (Link)


Last Call

I should have shared this 2 weeks ago on Derby weekend when a friend sent it to me, but I just got around to reading it this week. It’s literal LOL funny and some of the perfectly placed lines are a sterling example of good writing.

Hunter S. Thompson’s The Kentucky Derby Is Decadent and Depraved (Link)


From my actual life 

I got my second Moderna this week. No fever or chills, just some fatigue and listlessness. Might have eaten a box of cereal. Or two.

Long issue today. Signing off.

Moontower #108

Friends,

Last week, I talked about the trap of confusing what you do with your meaning. I admit I don’t have too much insight on meaning:

I suspect we all have to create our own meaning… I don’t have an answer for the “why”. I just know that it’s not necessary to confuse “what you are doing” as your “why”. I think we can figure out what we should be doing without a “why”.

Marrying meaning and what you are doing is hard for many of us including me. One of the ways it can manifest is if you fall on an extreme end of the thinker-doer continuum.

  1. At one extreme, you are paralyzed by a lack of purpose and many choices. You spend so much time in your head trying to introspect your way out of the mud and clouds, instead of just setting even an arbitrary goal and seeing it through.
  2. On the other end, you are a whirlwind of activity, maybe even accomplishments, and find yourself in a crisis of self-rationalization because you can’t tie your output back to any sense of meaning.

Maybe the grass is greener, but I think #2 is a better place to be since purpose and meaning are elusive no matter where you are. I have made it clear that I’m in the camp of “get out of your head”. Instead, I recommend get unstuck and move.

So putting the “why” aside, and accepting that you need to get moving, let’s examine perspectives on what you should be doing.

Ways To Fail

How to spend your time is a question that many grapple with (if you don’t, consider yourself extremely lucky). The reason is that we must all balance our goals with what we enjoy doing. You’ve all heard the “follow your passion” advice and the backlash to it — “you become more interested in things you’re good at”. There’s also the parable of the old man who gets the kids to stop playing on his lawn by offering to pay them a dollar every day that they do play on the lawn. As human nature would have it — they predictably stop.

Ultimately, neither view is complete. The first advice fails to acknowledge the role of ability. The backlash underestimates the virtuous loop of working on things that interest you even while you are struggling. Eventually, everything gets hard so it’s beneficial if what you are doing naturally appeals to you.

When it comes to meta-questions about what you should do, there’s rarely a cut and dry answer so it’s more useful to identify the failure modes.

  1. Too Much Grit

    I’ve warned you about taking the idea of “grit” too seriously. Grit is important but at some point it’s counterproductive. If you have amusia, save yourself the grief of auditioning for American Idol. Sometimes “hard equal wrong”. One of the best takeaways from David Epstein’s Range is the importance of “match quality” and avoiding “premature optimization”. Cedric Chin illuminates that work in his passage The Trouble With Too Much Grit.

    If you bang your head against a wall long enough you might be doing the wrong thing. The need to be encouraging but realistic is tense. A recent warning I gave to aspirational option traders starts “if your goal is to become rich, the vol career is a bad strategy”. Sorry, I can’t make reality go away.

  2. The Competence Trap

    If you focus too much on what you are good at you can find yourself in what Scott Young calls a “competence trap”:

    If we see our engagement in professions and hobbies as a way of getting rewards (money, respect, achievement or just fun) for the time we invest, we can see how this can create a trap. As you get better at some things, the opportunity cost to learn something else increases. This funnels you into a narrower set of hobbies, passions and work than you might otherwise be capable of.

    Now there is nothing wrong with specialization. But here’s what I find interesting:

    One flaw of a positive feedback loop, is that it tends to exaggerate small differences. Have a really discouraging math teacher may push you off the path to learning more math permanently.

    Thus, I think our interests are artificially narrower than they could be. We could have more interesting hobbies, more diverse skills and more varied professional lives. True, some of the obstacles we face are cognitive—our talents lie elsewhere and so we build on our strengths—but much of the obstacles seem to be affective as well. We stay inside our boxes, not because we can’t climb out, but because we lose the curiosity to see what’s outside.

In Between The Failure Modes

In between those extreme mistakes of:

a) trying to be Michael Phelps when you’re built like Shrek

and

b) avoiding writing because you happen to be really good at coding

there’s a wide range of endeavors that we are suited for. Even though we have natural cognitive differences in intelligence and therefore learning rates, the larger barriers are what Young called affective. The word affective encompasses moodinterests, and motivation.

We are going to focus on the big muscle movement here: motivation.

I know what you’re thinking. “You said we were going to figure out what to do without a why or purpose”. Here Young offers us a view of motivation that sidesteps metaphysical questions. Motivation is driven by 3 basic psychological needs just like water satisfies the physical need of thirst.

Those needs are:

  • competence
  • autonomy
  • relatedness

They are best demonstrated by Young’s example:

So even if you had a natural interest in math, if you feel like you’re no good at it (competence), that doing poorly will result in others thinking less of you (relatedness) or you feel forced to do it for school (autonomy), it’s unsurprising that motivation plummets.

In contrast, if you felt like you were pretty good at math you might get reinforcement from the teacher and peers (relatedness), feelings of skill as you take on new challenges (competence), and you might even seek out to understand things yourself (autonomy). Your interest in math grows, just as it withers for the people who weren’t as lucky.

Why These Ideas Resonated With Me

I’ve been confused about what I’m doing for as long as I can remember. There are pockets of clarity, usually about the 2 feet in front of my face. But I just don’t own any religious or VC-influencer top-down visions of the world. So I think about our needs to belong (and I think our need to feel like we are contributing is part of that even if it’s not the ends in itself). So of course these topics, which make belonging easier, resonate.

  1. Match Quality

    It goes back to the idea of matching your talents to what you do. You will go further for the same level of effort if you get this right. The guidance counselor is looked down upon as a joke profession. If it is then it’s because of the people who occupy it not because of its function. Guiding children and teens’ minds strikes me as one of the highest leverage objectives of a society. The guidance counselor might be an impotent channel for this but the objective of matching potential to opportunity is both useful and merciful.

  2. Premature optimization

    This is the other side of the “match quality” coin. Parents should be careful how they label children because they listen and internalize — “he’s an athlete”, “she’s pretty”. Try to encourage children in ways where they don’t subtly hear another door closing. Like adults, children are prone to think in false binaries. You are a good writer OR good at math. You are good at drawing OR good at sports. The tradeoffs in how we treat kids are everywhere. Redshirt your child in kindergarten so they can be the oldest in the class, but then what happens when they are bored?

Think of all the possible things you could do with your time. When you come home from work, how small is that menu compared to the full conceivable set? It’s a hypothetical question, and it gnaws at my thinker side. It’s been helpful to keep in mind the idea that our motivations are a function of competence, autonomy, and relatedness. The competence trap reminds us that our choices are wider than we think and as we debate what to do, our aptitude is only one consideration. There’s plenty of area under our natural limits to explore regardless of how low those limits might appear. If the prospective action fills up the buckets of autonomy and relatedness it can still be extremely worthy to pursue.

Ok, this got pretty long. Hopefully, this has expanded your horizon without ever needing to invoke purpose. If you have an answer to that one, well, you know where to reach me.


The Money Angle

  • Understanding Vega Risk (Link)
    Moontower

    I wrote a new options post. It starts:

    In a chat with an options novice, they told me they didn’t want to take vol (vega) risk so they only traded short-dated options. This post will explain why that logic doesn’t work.

    Here’s the gist:

    It’s true that the near-term option’s vega is not large. That is counterbalanced by the fact that near-term implied vols move faster (ie are more volatile) than longer-term vols.

    The goal of this post is to:

    • demonstrate that near-term vols are more volatile both intuitively and with napkin math
    • show the practical implications for measuring risk
  • The Crypto Cash and Carry Trade (YouTube)
    Pirates of Finance

    Immediately one of my favorite YouTube channels, Corey Hoffstein and Jason Buck take a light-hearted approach to finance topics. These are high-level finance guys having some fun with money concepts. This video is awesome as you get to watch over Corey’s shoulder as he screenshares the BTC futures arbitrages. He explains the risks. You can decide if the prospect of 15% to 35% returns are worth it. Jason plays the straight guy and smiles a lot.


Last Call

  • How to Write a Curation Newsletter [Consistently & Sustainably] (Link)
    Roxine Kee

    This is the best advice for starting a curation newsletter. I actually started Moontower with a curation focus. It turned out to be the lube I needed for original writing and the start of the super long con that I myself haven’t figured yet.

  • Gradations Of Rich (thread)
    @TrungTPhan

    “A Redditor who runs in high net worth circles writes on the “gradations of rich”. He explains in minute detail the difference between being worth $10m+ and $1B+. It’ a doozy”

    I’ll say. This went justifiably viral if you wanted to know how the other half of the other half of the other half live.

  • Asking Supercar Owners What They Do For A Living (TikTok)
    @ItsDanielMac

    The reactions here are pure fun.


From my actual life 

We hosted Yinh’s family for a bbq pool party. Yinh’s mother is one of 12. Most of them live in the Bay Area so we had 40+ family members here yesterday. I was the tallest. By a lot. I am also the hairiest.

Yinh’s grandmother (mom’s side) also visited. This woman had 12 live births (no twins). She has been pregnant for much of her adult life. I seriously feel moved just being around her. She embodies peacefulness, a living treasure.

With such an unusually large family, you get some unusual, um, facts I guess. Here’s two:

  • The grand-matron has grandchildren older than her own children
  • Some of the grandchildren were nursed by their mother and their grandmother because they had babies near the same time.

With that, Happy Mother’s, Grandmothers, and Great-Grandmothers Day (I love you mom, thanks for maybe reading this)!

Moontower #107

Friends,

I saw a tweet from @theSamParr that hit home.

There are many dimensions to us all but our sorting minds love a good ol’ duality. The tweet conjured the “thinker-doer” dichotomy. I place myself on the thinker end of the spectrum.

Pangfully.

explained this insecurity on the 1 year anniversary of this newsletter:

Life feels best for me when I’m in a flow. Building. Producing not just consuming. And if this experiment taught me anything, it’s to introspect a bit less. Have more of a bias towards action. This isn’t my default. I’d say shoegazing was more my thing (I won’t lie, I do dig Jesus and Mary Chain). To people who are naturally wired for action, like Yinh who many of you know is a first-ballot Hall of Famer at getting sh%t done, this sounds obvious. Subeasy even. But I know I’m not alone. I know from conversations with many readers who are struggling with inertia. 

My buddy @darjohn25 response to the tweet echoed my own feelings:

This of course reminds me of the quote:

Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.

If you are struggling to be a do-er, if that “reductionist” tweet put you on the defensive, let me first offer a forgiving perspective.

You Are Not A Profile Bio

My mom has been visiting for the past few weeks and we have been taking a walk together every morning. We were discussing how she felt lost for 3 years after she retired. She missed structure. She felt useless. Self-doubt was replacing self-worth.

I challenged her.

Did she realize how much utilitarian religion she had internalized? If your self-worth is tied to legible output you are on shaky ground. You are a small logical leap to “people who do more are worth more”.  It’s an equally small leap in the other direction to victim-blaming. The philosophy fails the test of universality. What is the value of severely challenged, handicapped, or sick people in that framework? Even if we extend the framework to the gap between what you have done and what you are capable of, is that any better a foundation? You might as well look at your naked self in the mirror and score your life based on your eating choices.

These outside perspectives are worth a look:

  • The Truth About My Son (YouTube)
    Mark Rober
  • The Danger Of Tying Your Self-Worth To Your Net-Worth (Link)
    Khe Hy
  • Your Money Says Too Much about You (Link)
    Moontower

Punting The “Why”

My mom’s problem disguised itself as “what should I be doing?” when it’s really a “why do we do anything?” I wasn’t being hard on my mother. I was pointing out how merciless she was to herself. Workism is wasted piety. I feel bad saying that the foundation of “work equals value” is shaky without offering an alternative. I suspect we all have to create our own meaning. And my mom admits she never explicitly recognized the script that was guiding her. If you haven’t identified your own, I’ll give you a hint: your insecurities reveal your religion.

Returning to my thoughts from 1 Year of Moontower:

There are people of all ages searching for what they are good at. What they should be doing. People that don’t know their strengths. They are curious and eager but don’t know how to direct their energy. The prescription for all of them is to just take a small step and do something. If you want to get fit, don’t wait until you buy the running sneakers you think you need. Just do a few pushups right this second. The action muscle needs to be trained. I’m working on it too. Readers, if you fall in this camp and you hang with me every week in this letter, I’d bet you have a lot to give inside you. But you can’t introspect it out. You have to take a step. And you need to continue. Like a dumb mule. Forward. Why? “Why” is a shoegazing question. Drop it. The why will come to you later. The only formula that matters today is effort x reps equals something big. If you multiply either by zero, you get zero.

In other words, I don’t have an answer for the “why”. I just know that it’s not necessary to confuse “what you are doing” as your “why”.

I’d have more luck holding my breath to scuba dive than coming up with answers to life’s meaning, So next week I’ll target an easier meta-question: “what should you be doing?”. Just as we don’t need to confuse our “what” with our “why”, I think we can figure out what we should be doing without a “why”. Darrin’s “talent/interest mismatch” is a clue.


The Money Angle

Understanding Returns

@10kdiver asks:

Imagine we have 2 businesses, S and F.

S is a Slow Growth business. Its earnings grow at 6% per year. F is a (relatively) Fast Growth business.

Its earnings grow at 9% per year. Both businesses are trading at 15 times earnings.

Which is the better investment?

The answer depends on how much capital it takes to create the earnings. This thread is an easy-to-follow explanation of a critical investing concept.


Questions About Managing Tail Options In Your Book

These are copy/paste replies to a friend who asked my opinion on options.

  1.  What do you think about “hard” vs “soft” deltas? I.e treating your otm deltas differently than your atm or itm deltas. Specifically not delta hedging when you buy otm wings?

    My response:

    Depending on the name and how the skew behaves I’d say my experience in normal conditions is OTM options have lower deltas than the model predicts. The prices are “sticky”. So if I’m running a book long lots of OTM options I’m going to lean my delta in that direction.

  2. What about if you get long vs short those wings? Would you treat the delta differently depending on that?

    My response:

    You can’t hedge a wing short with anything but other options so it would depend on the option hedge. In general, I don’t open selling wings just because they are “high”. I will sell expensive wings closing. Also, there’s asymmetry with respect to how you ended up with a wing position. Typically you can get long them at reasonable levels because they are the leg of a spread that’s popular in some market. For example, in oil markets, when producers buy put spreads they are handing you the wings. Yummy.

    In general, the only way I end up short wings outright is if the underlying makes a huge move through [for example] a short call spread, blowing thru both call options. Well, now I’m synthetically long a put spread and therefore short the left tail.


Last Call

If you think about the thousands of tabs you’ve ever had open reading blog posts, it’s amazing to think of how a select small percentage linger in your mind. They influence you. You probably shared them with others. This newsletter give me a chance to share them easily with others. Many of them become the subject of my commentaries. Sometimes I share them without much of a blurb.

I decided to create a public Notion page that indexes posts by others which have been deeply influential or at least stand tall in my mind. It’s not exhaustive, since I can’t remember each one of them easily. But when I cross paths with them again, I now have a handy place to add them.

You can find the index here:

Moontower’s Favorite Posts By Others

While creating this the shortcoming of a chronologically-ordered blog became obvious. So I have also created an index of all the writing I’ve done publically.

Find that below:

All Moontower Meta Blog Posts


From my actual life 

Normalcy is snapping back quickly.
  • We got a sitter Friday night and went to a dive bar (Retro Junkie in Walnut Creek). Fireball was involved.
  • I joked on Twitter about the need for some overfunded startup to tackle the scheduling Tetris that comes with trying to book summer camps. Since nobody responded with “bitcoin fixes this” I presume it’s hopeless.
  • Maxen turns 5 today. Here’s to hoping the super-soaker event doesn’t turn into a super-spreader event.

When Zak turned 5 I wrote him a long letter that I will give him when he moves out one day. I’ve been thinking about what I’m going to write for Max lately. The nurses in the maternity ward warned us. The way he screamed when he was hungry was unusually intense based on the sample they had seen in SF baby factory known as CPMC.

Max is brooding and extremely hot-blooded. Nothing like his older brother or his parents. He keeps us all on our toes. He’s the family clown. He’s also the one to grab you around the neck at random, kiss you on the lips, and declare his love to you. I used the Chris Joke last year on Max’s birthday…I don’t know if we are saving college money or bail money.

5 years ago:

More recently: