Friends,

Let’s hop right into a recommendation.

This essay is packed with useful decision frames. If you’ve been with me for awhile I think you’ll understand why I’d appreciate it.

In praise of quitting (Cate Hall)

From the opening:

• the danger is in devoting our days to something that fundamentally doesn’t matter to us, because we’re too afraid to cut our losses.
• Tournament poker is basically about finding the highest-value uses of a scarce resource, your chips. The fact that losing those chips means getting completely locked out of a shot to win major money means that their opportunity cost is high. This means it can be a big mistake to commit yourself to hands that are somewhat positive-value in expectation, if you have good reason to believe there will be better, higher-value opportunities…Life is, of course, just like this: You get only one shot, and it’s up to you to make the most of it by rejecting okay or even pretty good ways to allocate your time or other resources — to hunt down the opportunities to make really great bets on yourself. Do not make barely positive-value bets with your life!

A description of almost anyone can relate to by middle-age, if not earlier:

The interesting thing about steady jobs is that they’re actually not so steady. They are static in a conceptual sense — in the sense that if you say you’re a “lawyer” when you’re 30, and say you’re a “lawyer” when you’re 50, there is the same label for what you do. And that can feel like steadiness, like a reassuring kind of coherence to your life story.

But the truth is that everything is in constant flux. Beneath the labels, life continues evolving all the time. Your interests change, companies change, and industries change. Given that your “steady job” is constantly evolving, even if you picked the highest-leverage option initially, there is a low chance that it will remain your highest-leverage option over time.

The same goes for places to live, relationships, opinions, and hobbies. Over time, these things can degrade in value or resonance — and yet still retain the emotional pull of their initial promise. And when this happens, people often stay too long.

Cate offers some exercises or what I think of as useful frames:

By default, we tend to think of “choices” as the kinds of things that take us off the path we’re already on. From this stance, it doesn’t feel like we are “choosing” to go to our job every day, or choosing to remain where we live. The scary thing is that this means we can actually be making the biggest mistake of our lives on a daily basis, despite it feeling like nothing is happening at all. If we want to evaluate whether our current set of choices is really best or whether it’s just inertia keeping us where we are, it can be powerful to upend that frame.

Try it. Go around your day, narrating all of your choices to yourself. With everything you do, consciously say, in your head: “I am choosing to do this, because it’s the best course of action according to all the information I have available.” See if it feels true. It might — perhaps this exercise will reinforce your conviction. But you might also find that entire regions of your life suddenly look strange. The declaration that you’re doing the best thing will sound like hollow propaganda, an attempt to convince yourself of something you know just isn’t so.

More:

Another powerful exercise, of a similar kind: Imagine that you were instantly unsubscribed from everything in your life. All of your choices undone — where you live, who you’re with, what you do with your time. All of a sudden, you’re a completely empty canvas. And then, imagine that you have the power to bring back each element just by hitting a “resubscribe” button, like it’s an email newsletter. Being honest with yourself, which elements would you hit “resubscribe” on?

Once you realize you’re choosing something, you regain the ability to un-choose it.

Note that un-choosing doesn’t always mean quitting in the complete, traditional sense. It might just mean an alteration — working hard to establish a new phase in your relationship, or changing roles at your job, or moving to a different neighborhood rather than a different country. This, too, is strategic quitting: declaring that a given battle is over so that you can win the war.

She closes with a bright side.

Leaving can still break your heart even though it’s the right thing to do…But something to remember is that there is always some unknown part of the future that you will be equally fond of.

When people think about quitting, it’s hard because they’re comparing the rich web of attachments they have now to some mostly blank slate, or, worse, the possibility of disaster. However, what’s more realistic to imagine, if you’re leaving something you’re no longer aligned with, is a future with more to love than you have now.

My 2 cents since we’re here.

Quitting the familiar always feels risky. And to be clear, it often is. But it’s also risky to stay and even though we can feel that in our hearts, we don’t seem to warn people about that risk with the same urgency we do about when they plan to change.

The asymmetry is an expensive risk reversal. Paying up for the put, and hittin’ bids on calls. Playing for upside, I don’t mean financially, although that can be included, demands courage. Not heroism. Small courageous steps. Folding a comfortable hand never feels heroic, but it does take courage. It risks looking like a fool.

We are surrounded by grand examples of ambition. Bottomless appetites for wealth and power. But figuring out how to live on your terms, around people you are happy to be around, working on things that light you up, and staying true to your values is an ambitious goal. Pulling that off is hard because unless you got lucky and ended up on YOUR path from the start, at some point you will need to know when to quit.

I don’t know where I heard it, but someone said the reason some finance people stay in finance (unhappily) long past satisfying their financial goals is that they can’t do anything else. Not in a “they lack the ability” but in a learned helplessness kind of way. They cannot stomach the hit to their identity, status, or sense of usefulness, even if all of it is in vain. For appearance. For others. For lack of creativity. Soul last seen on the back of milk carton at age 17.

On a personal note, even having went through a substantial quit, I’m still not here to glorify it. I effectively run a craft consumer-facing small business between the writing, consults and option analytics. Bruh, I’m teetering on the edge of self-doubt and self-belief from day to day.

Making money and creating surplus go together. That I make less than I used to hurts because it feels like a statement about the surplus I create.

[I obviously understand that it’s not that simple. Leverage and ability to capture a share of surplus are giant inputs into what you actually get paid. That there’s no-name closet indexers richer than your favorite drummer is capitalism’s bunion but I’m not suggesting we amputate the foot even if I’d get some perverse joy from clawbacks against people who suck.]

Still, I wrestle with this quite a bit. I don’t really see myself as a businessman. As someone who would spin something up just because they see an opportunity. I’ve always been impressed by those kinds of people because I wish I could be like that. But it’s hard for me to care about something unless I love it. I don’t care about solving a problem just because it exists. There are infinite problems and I have one attention span. To a businessman, profit helps them filter. But more money than I actually need* is not motivating enough to do work I don’t care about. How would I even be excellent at something I didn’t care about?

But this perspective is a constraint of my own making. I don’t get to eschew opportunism and then complain that’s how the world and economy work. As it goes, I’m trying to figure out how to make more money doing these things that intersect my interest and ability. There’s a better product-market fit at the end of this rainbow, but finding it is harder than trading, and there’s no guarantee it will pay as well. But I’m immersed in the process of going there. And for that feeling, quitting was right for me.

*Adulting means you gotta do whatever you gotta do to make what you need OR lower what you need. But I’m talking about the same decisions we all make on the scale that is personally relevant. For some, it’s the choice of doing X for the 100k they need or Y for the extra 50k, and for others it might be the choice of $500k working remote or $1mm being on the road 60% of the time. Cate’s point in this essay is that everything is a choice and when you forget that become an entitled victim. Or to use one of my favorite lines…you’ve exchanged a walk-on part in the war for the lead role in a cage.

Money Angle

I want to clarify a statement from my chat with John from Risk of Ruin.

I said “vol trading is easier than directional trading”.

This is something I’ve felt from experience. I long attributed it to derivatives pricing being, well, derivative of an underlying. Trading an ETF or index future, both derivatives, is “easier” in the sense that there is a fair value with respect to some assumptions like cost of carry but the variation in the assumptions is vanishingly small compared to the error bars on the assumptions one makes when formulating an opinion about a stock price.

For options, most of the inputs except volatility also have error bars that are far smaller than anything you’ll assume about a stock.

Which brings me to volatility.

Volatility is more stable than returns.* This is why quants target risk in their sizing, not returns.

🔗See Know-Nothing Sizing for a fuller discussion. It’s an idea that underpins my approach to investing and risk management.

So if handicapping volatility is easier than handicapping returns, shouldn’t everyone just trade options for that sweet, easy cash?

The fact that it’s easier, also means the competition is fierce. It’s a zero-sum, capacity-constrained game. Predicting vol is easier than predicting returns, but…so what? You care about “how easy is it to make money?” and that is not easier.

The distinction reminds of this Daryl Morey bit on sport analytics:

Our underlying data is more predictive, quite a bit predictive. I talk to a lot of quants on Wall Street, and I tell them our signal to noise ratio using whatever measure you want….And they go like —whoa, you guys are — that’s incredible. And I’m like, yes, but you remember, we have to be best of 30. You guys just have to beat the S&P by 2% and you are geniuses. So each industry has its own challenges.

*For the option enjoyyyyers who are thinking “Bruh, VVIX is way higher than VIX, how can you say vol is less volatile than the vol of returns?”, here’s my rebuttal: What’s your 90% confidence interval on SP500 returns next year vs SP500 1-year realized vol?

An investor doesn’t care about vol of vol as if they are trying to price an option on VIX. If SPY realizes 14% give or take 5 points for a year (this is about the high/low range of 365 day vol using overlapping data for the past 4 years), this is not as destabilizing as the outright returns being say -5% vs +15% which is probably an even narrower relative range than 9% to 19% for a 1-year realized vol.

Money Angle For Masochists

Speaking of VIX…

Here’s an FYI that reinforces a lot of moontower 2025 writing on option synthetic futures.

This is from my IBKR screens from 10/22:

Spot VIX was 18.4

I highlighted the March VIX future. It had a mid-market of 21.725

The ATM strike for options on VIX expiring in March is 22.

The combo or price of the 22 synthetic =

call price – put price = 3.50 – 3.78 = -.28

Synthetic future = Strike + Combo = 22 -.28 = 21.72

No arbitrage available folks (as expected).

The synthetic future on VIX and the actual VIX futures trade in line.

💡The VIX options typically expire on the Wednesday morning preceding monthly option expiry cycles. The future expires on Thursday morning, 1 day later. For them to trade out of line with one another would imply a significant jump in forward vol for 1 day, and working through that math with our forward vol calculator can be educational. Unless there is an extremely impactful event on that Wednesday, I’d expect the actual and synthetic futures to trade in lockstep. A good homework for option firm trainees might be to draw indifference curves for various DTE (ie 5, 10, 30, 60, 90) of forward vols based on the VIX future vs synthetic future. I haven’t done it, but I imagine it will be self-evident that any variations between the 2 would be worth trading against, justifying why they trade in lockstep.

Like I said I haven’t done this, so I’m going off intuition on how forward vol works. If you are a VIX complex arb trader (I know you’re out there) feel free to correct me.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• so you’re interested in trading…
• Options on Levered ETFs (part 2)

Friends,

Last Sunday morning’s letter talked about reading. The night before at my cousin’s wedding, he quoted CS Lewis in his speech. Later that Sunday, he was hosting a post-wedding fiesta at his house and the topic turned to book suggestions.

He recommended Lewis’ Screwtape Letters. I have the book but haven’t read it.

[Actually we have 2 copies now because my wife ordered it on my cousin’s rec not knowing I had it, but it works out since I can’t find mine since the move.]

My mother was visiting this week for the festivities so she opened it up and read the first page. She couldn’t understand it. I took a peek. I could read it just fine and in fact I quite like the style but it’s certainly harder than reading popular novels. My mother is a voracious reader, both fiction and self-help, but it’s all Dan Brown level.

I looked up its Lexile Score*.

*According to the Gemini blurb at the top of your Google search that steals views from someone else’s site, a lexile score is a measure of how difficult a text is based on attributes like sentence length and vocabulary

1170.

I looked up Lexile scores for Harry Potter or Dan Brown stuff. It’s all in the 850-920 range.

For context, I highlighted those mid to upper 800s here:

A top decile 3rd grader reads the same as a bottom decile 9th grader. Popular writing is about 4th-grade level. I asked my 7th grader to read a page from Screwtape and he liked it! He started it this past Thursday, after wrapping the Unwanted series he was addicted to. I looked them up. Only about 800 Lexile. Confirming my frustration that while he reads a ton, it all seems below grade level.

But I guess that’s true for almost everyone.

If interested, years ago, I compiled this table of books for kids based on reader recs or personal experience. It includes Lexile scores:

https://notion.moontowermeta.com/book-ideas-for-kids

Job Posting

Financial Sourcer/Researcher – Part-Time, Remote (Greythorne Associates)

We’re looking for a skilled researcher who can find talented quant traders, PMs, and strategists—the people who don’t respond to generic recruiter messages.

Greythorne is Stacey Crognale’s recruiting firm. Stacey was the director of HR at SIG when I was hired back in 2000. She started Greythorne in 2007 and specializes in quant finance with an especially strong pipeline in prop trading. This role is not an external mandate, but to work with her directly.

—> Apply here

A chat with John Reeder

John is the man behind the Risk of Ruin podcast. He interviews advantage gamblers and the occasional investor. The format is one of my favorite. It’s more like an audio essay than an interview. He does a lot of writing for them, weaving together his knowledge and lessons from experience and discussions, and then treats the guests answers the way you quote in an essay.

I’ve always been impressed by how well they are put together not to mention how much work they clearly require. As a long-time fan, I was totally honored to be invited on. John’s questions are always thoughtful and unique.

🎙️The episode is available on Spotify

We don’t get into the nitty gritty of options because that’s not the audience here, but for those interested in options, I do explain why vol trading is easier than directional trading (and why this is not the refuge it sounds like).

Money Angle

So You Want to Abolish Property Taxes ( Lars Doucet)

I remember being on some freeway, I mean highway, in the DFW area and seeing a billboard for some candidate promising to 86 property taxes. As a CA resident drawn to Georgist economic principles, in no small part due to Lars’ persuasive education, I’m just shaking my head as I whizz past the smarmy ad. Like what’s wrong with you? Your state’s economy is a positive role model — no state income tax, high property taxes, and allows builders to build. And you come up with this?

If your plea of “Don’t California My Texas” amounts to symbolic own-the-libs gestures like banning rainbow crosswalks and cannabis while inviting, hell, speedrunning Prop 13 distortions, then you are about as serious as a pixie stick.

Lars breaks it down so well, just check it out. If nothing else, read the section Answers to Various Objections.

Money Angle For Masochists

Option trader and author Euan Sinclair published a labor-of-love project that will become a cult classic for trading nerds.

The Theta Pig Letters

It is a remarkable pastiche of none other than — The Screwtape Letters.

The Screwtape Letters are an escalating correspondence between the devil and his demon protege Wormwood. The devil is teaching his dear nephew how to sabotage the lives of humans.

The Theta Pig Letters are an exchange between a master manipulator and his understudy whose trying to undermine traders attempts to succeed.

It’s not only brilliant, it’s fun to read. The condescending tone towards the incompetent nephew is relentlessly hilarious.

You can download it here:

The Theta Pig Letters

665KB ∙ PDF file

Download

A selection of excerpts:

• The mistakes described here are not rare. They are routine. They do not announce themselves as errors. They arrive dressed as insight.
• My dear Backtest: Congratulations on your first assignment. There is nothing quite so exhilarating as the early days of a Patient’s trading career, when vanity and vulnerability sit so invitingly close together. Trading, you must tell him, is uniquely stressful. Unbearably so. More grueling than any other occupation. (Do not, under any circumstances, allow him to reflect that bartenders suffer drunks, that teachers manage thirty howling infants, or that soldiers are expected to remain calm while being shot at.)Encourage him to think of himself as a kind of artist-warrior—misunderstood by ordinary mortals, ennobled by his suffering. His partner’s raised eyebrow becomes an attack on genius. Any well-meaning question is interpreted as doubt. He will learn to ignore those who do not mirror his self-image and surround himself only with those who validate it.And better still, he will eventually seek out “kindred spirits”—online forums, trading chatrooms, or overpriced mentorships—where the mythology is reinforced. He will not look for conflicting views or rigorous critique. He will look for comrades in suffering, not comrades in truth. A good trader seeks out disagreement; your Patient will seek only confirmation. the more he believes that trading is uniquely punishing, the less responsibility he will take for improving his own skills. The idea that competence, not courage, is the antidote to stress must never cross his mind. If he begins to study properly, to practice restraint, to track his errors with cold detachment—well, then you will have lost him. He will, without realizing it, become sturdy.
• Let him convince himself that the law of large numbers is his ally, not his executioner.
• Let them drown in a sea of partial differential equations and symbolic regressions.
• Let them believe that beauty implies truth. Encourage him to chase symmetry where there is only noise, to assume continuity where there are jumps, and to impose causality where there is merely coincidence. Most importantly, let him believe that the clarity of a model matters more than its performance. That the elegance of his thinking is a substitute for testing. Make him allergic to heuristics. To approximations. To ugly truths. Let him scoff at simplicity and worship coherence. If you succeed, he will spend months—perhaps even years—building intellectual castles in the sand. He will conflate sophistication with strength. And when the tide inevitably washes those castles away, he will rebuild them: higher, more intricate, but equally unstable.Let him mistake thought for progress. That has always been our favorite kind of failure. And, Satan knows, you should be familiar with failure.
• Let him believe that by reading financial statements, scanning headlines, and pondering macroeconomic conditions, he can infer what the market has missed. Encourage him to imagine that he is not reacting to price, but interpreting value. He will feel sophisticated. He will say things like “market overreaction” and “long-term thesis.” He will call himself a contrarian and imagine that patience is a strategy. Do not let him suspect that he is merely doing what everyone else is doing: consuming public information and projecting his own beliefs onto it. He must never consider the possibility that the balance sheet he’s analyzing, the CEO he’s quoting, the trend he’s spotting—are already priced in. Let him imagine that the edge lies in how he reads the data, not in whether that data is actionable.This is especially potent for Patients who fancy themselves worldly. They will cite books, articles, and podcasts. They will draw connections between oil prices and grain futures, between central bank policy and auto sales. Let them draw. Let them weave vast, fragile webs of inference and call it research.Most important of all, convince him that the more connections he sees, the smarter he is. He will not realize that each new variable adds noise, not clarity. You must never let him notice that it is merely confusion with a vocabulary.And let him pride himself on general knowledge. He has read The Economist, after all. He remembers something about China’s shadow banking system. He once mansplained negative interest rates to a bored babysitter. He will come to believe that markets reward this sort of cleverness. That his perspective is not just informed—it is rare.Do not let him test this belief. Do not let him look at the returns of those who trade on earnings reports or macro forecasts. Do not let him study the failure rates of discretionary portfolio managers. Above all, do not let him ask how many successful traders he knows who rely on reading. (Kris: profound…success is being repetitive, in some ways dull. A hammer. Types that fancy themselves intellectual is not the archetype anymore than you expect a professional poker player sitting in a chair 16 hours a day in poorly ventilated, unglamorous room with smelly dreamers to have a James Bond passport and home library.
• Now we come to one of the most elegant diversions in our entire arsenal: the myth that risk management is the edge….If he were astute, he might see the absurdity of it all: that if risk management alone were the edge, then he could play the lottery with good position sizing and come out ahead. That perfect risk control, taken to its logical conclusion, simply means taking no risk at all. And there’s no edge in abstention.But he won’t see it—not if we play our part. Keep his thoughts on risk superficial. Let him use “asymmetric payoff” as a shield against deeper inquiry. Let him feel clever for “limiting downside while keeping upside open.” Just make sure he never notices that he doesn’t know where the upside is coming from.He will think himself disciplined. He will think himself wise. And best of all, he will think that not losing money is the same as making it.Let him worship at that altar, Backtest. It is a quiet church, and its congregation rarely asks for proof
• Letter XI: But if he asks, “Why is VVIX diverging from VIX?” or “Why is NASDAQ volatility rising while the Dow’s is falling?”—that’s dangerous. Because relationships are where inefficiencies hide.How does skew behave as realized volatility rises? How long does it normally take for implied volatility to relax after a spike? Do the VIX options and SPX options account for the weekend in the same way? These are the sorts of wrinkles that arise not because the market is dumb, but because it is constrained. Because participants face capital charges, mandates, and rebalancing needs. The inefficiency is often the residue of friction.But if your Patient starts thinking in this way, we’re in trouble. He’ll begin to measure rather than guess. To observe rather than judge. To know the structure well enough to notice when it flexes. And that is edge.Stop this immediately.Distract him with headlines. Give him a guru who trades Tesla based on vibes and political bias. Feed him chart patterns shaped like ducks. Whatever it takes to keep him watching the show instead of reading the script.Snuff the curiosity. Leave him the confidence.
• My regrettable aide,It seems I’ve overestimated you—again. You need help.You are enthusiastic, certainly. Eager. Occasionally—not often—effective. But in matters of craft, you remain a blunt instrument—loud where subtlety is required, impatient where patience would rot more deeply. And now, as the Patient begins to experiment with backtests, you must understand: this is a specialist domain that demands precision, not noise.Which is why I’m assigning you an expert.You will be working with Overfit. Do not speak unless spoken to. He does not tolerate enthusiasm. Or questions. Or you, if I’m honest— He will teach the Patient that systems must be tweaked, improved, optimized—until they hum with apparent perfection. He will praise him for reducing drawdowns, for raising Sharpe, for improving win rate by 0.03. And just when the Patient believes he has built something invincible… Overfit will let it collapse.Not immediately. That would be merciful. No, he will let it erode slowly, unpredictably, across market regimes that were never covered in-sample. And the Patient will blame volatility, not the process. He will tweak, not question. He will descend into an eternal loop of minor improvements. Like an old general planning for a war he fought many years previously.Overfit works in silence. In metrics. In elegance. He leaves no fingerprints—only code.Learn from him.He may even let you observe one of his routines: the 17-parameter breakout strategy that has a 1.47 Sharpe from 2008–2018, then disintegrates into noise. The Patient won’t discard it. He’ll “tune it for the new regime.” Again. And again. And again.Welcome to the second layer of hell, Backtest. You’ve played with belief. Now you’ll learn how to destroy through data
• Letter XIII (Overfit’s first letter): Poison the foundation. We ruin the story in two ways: through data, and through method. The Patient must never suspect that his dataset is already betraying him. Some of the most reliable sabotages are achieved before the first line of code is written…
• The point, Backtest, is not to mislead him directly. It is to cultivate his belief in rigor. To have him confuse exhaustiveness with validity, iteration with insight, and polish with truth.He must never think: “Does this idea make sense?”He must only think: “Can I make this idea work?”In this way, we will bury him in process. And the most beautiful part? When the strategy fails—as it must—he will blame himself. He will believe the system almost worked.That’s the mark of true failure: not that the backtest was flawed, but that it was nearly right.Almost correct. Endlessly refinable. Infinitely seductive.
• Let Him Worship the Process. That is your final goal. Make him revere the ritual of validation more than the reality of outcomes. Let him define his identity as a “data scientist” rather than as a trader. Let him think that discipline replaces insight.He will become a guardian of statistical purity. A monk of withheld data. And he will lose money correctly. There is no cleaner form of failure than that.
• Options. It is wonderful that the Patient has been allowed to discover options. Although I suspect you were just lucky in stumbling across this idea, it opens up many promising avenues for our project.You’ve done well to confuse him with the usual smoke: theta decay graphs, multi-leg jargon, and variations on iron condors named after insects. Now comes the ripest fruit: convincing him that an option strategy itself is an edge.Not the underlying market behavior. Not the statistical tendency of volatility to mean-revert, or of skew to overprice puts. No, no. The structure. The shape. The aesthetics of the trade. “My edge is in strike selection,” he said the other day. Selection! We are nearly there.Your task now is to seal the confusion between frequent and favorable. This is easier than it sounds. A wide short strangle, for example, wins often. Most days, nothing happens. The underlying chops around or drifts, the wings decay, and the trade is profitable. It is, in the short term, comfortingly correct. And like all good traps, it flatters his need to be proven right—again and again—until it suddenly doesn’t.What matters, of course, is the average outcome. Not the common one. But he has spent his whole life being rewarded for consistency, for pattern recognition, for turning in neat homework. The idea that a trade can win ninety times out of a hundred and still be a disaster is alien to him. Keep it that way
• Your next task is to convince him that knowing the Greeks is the same as having an edge. We must not let him realize that the Greeks are merely descriptors—thermometers, not thermostats. They measure exposures, but say nothing of whether those exposures are favorable.
• Make him identify as “a long vol trader” or “a short vol trader”. Make him pick a side before estimating which side is likely to win.
• Whisper to him that true mastery lies in perfect delta hedging. That one day, with enough precision, he will out-calculate uncertainty itself
• Your next task is to help him improve the strategy. Do not misunderstand me: we are not trying to make the strategy more profitable. We are trying to make it more elaborate.This is the art of post-discovery sabotage. The Patient has found something simple that works—some recurring pattern, some repeatable structure—and now feels the itch to “refine” it. Scratch that itch with gusto (it is no coincidence that mosquitos are on our side).Encourage him to add filters. Conditions. Weightings. Perhaps a volatility overlay. A moving average confirmation. A custom indicator. Or two. Or six. Suggest he look at volume, sentiment, cross-asset flows, macro overlays, news feeds. It doesn’t matter what. Just keep adding. Convince him that if he stops refining, he’s being lazy. That the real professionals are out there stress-testing their systems across twenty-seven regimes and fifty-three metrics and nine asset classes. Let him think elegance is amateurism. Most importantly, get him to optimize. Not once. Not simply. But obsessively. Every parameter must have a range. Every range must be backtested. Every backtest must have cross-validation. Let him run grid searches until his processor whines as much as you do. Let him discover the perfect lookback period, the ideal stop-loss, the optimal entry condition for a phenomenon that doesn’t. Over time, the original idea—the edge—will be so buried beneath rules and tweaks that even he won’t remember what made it work in the first place. If the strategy fails, he will have no idea why. He will re-optimize. Re-fit. Re-torture the data. Let the logic drown in complexity. Let the confidence die by a thousand knobs.
• Automation: I am delighted that you have prompted the Patient to automate. This is the first real initiative you have shown and somewhat assuages my concerns about your ability and potential. Splendid. He will tell himself this is about efficiency. “The logic is sound,” he’ll say. “Why not let the machine handle it?” He will cite objectivity, discipline, and scalability. He will feel proud—professional, even. What he will not notice is that he is about to spend weeks automating a task that takes two minutes a day to do manually. This is the first victory: the gift of misallocated time. Every hour he spends writing code, debugging data feeds, and integrating APIs is an hour not spent thinking about the trade itself. He will be productive but only be producing something pointless.And the best part? Even if he gets it all working, it will still fail. Possibly not immediately, and probably not dramatically. But slowly, subtly, and in ways he won’t trace back to us.There will be bugs, of course. A mislabeled column, an off-by-one error, a missing data point that seeps through the system like a weeping pustule. He’ll fix these issues eventually. But each error will chip away at his trust. Not in the system—he’ll double down on that—but in his ability to implement it. He will begin to suspect he is the bottleneck. That more automation is the answer. Now comes the second level failure. Once automated, the trading process no longer asks anything of him. It runs. Quietly. Invisibly. His only feedback will be a daily P&L, eventually unnoticed, like the death of a woman who lives alone with the cats that will eat her. There will be no touch, no feel, no reason to monitor execution or slippage or spread. No sense of flow, timing, or friction. And because he no longer must think about the trade, he eventually won’t.The edge might remain, technically—but it will be unexamined, unmonitored, and unprotected. Execution costs will creep in. Fills will worsen. The strategy will degrade, not from a fundamental change in the market, but from neglect. And he will not notice.You must understand, Backtest: automation does not always kill by malfunction. It kills by abstraction. By replacing attention with convenience. By allowing the Patient to feel like he is trading when he is, in fact, only observing a spreadsheet. If you allow the patient to automate something out of necessity you will have committed a great error (and will be punished appropriately), but if he automates out of convenience then you have had quite a success. Please don’t ruin such a promising start.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• another brick in the wall
• Options on Levered ETFs (Part 1)

Friends,

If you read nothing else in today’s letter, hear me now: THANK YOU.

Thank you from me. Thank you from my good friend Jamie’s entire family. Words cannot rise to the occasion.

You will recall a March issue titled Moontower Unite:

I got a distressing text on Tuesday. A close friend I grew up with informed me that her younger brother’s daughter, Rachel, was just diagnosed with AML, a rare aggressive leukemia. Rachel turned 10 this week.

I just sat there. What is there to say? How can I help?

Her little bro Jeff was like my own little bro and now he’s living a nightmare. Not to mention having an 11-year-old daughter who is being passed around the relatives in NJ as the parents will be posted up at Children’s Hospital in Philadelphia for the next 5 months for what is just the preliminary stage of treatment. Daily in-patient chemo.

I went to Twitter and found that the follower community there is amazingly generous and I promised to put this in the letter as well. There’s no pressure.

Jamie texts me again a few days ago with a link to her Facebook:

After admitting she’s been sobbing for 2 straight days, Jamie followed up to send a thank you to all you readers and followers.

I didn’t share the prognosis at the time. Nobody would want to write those words.

So if you responded to either the gofundme or even my later plea for bone marrow donors treat yourself today. To borrow one of my wife’s favorite quotes — you may not be able to change the world, but you can change a world.

And you did.

Exchange Students

For the second time in three years, we participated in a program to host Japanese exchange students for a week.

We do it through local org that brings students a few times a year. Our guests were 2 16-year-old boys, Yuki and Haruto.

Here’s how it works:

• After some vetting, the org matches you with 2 students and gives you $700.
• We pick up the boys on Sunday evening. In this program, there was a total of 40 students.
• We bring them to BART each morning so they can join the rest of the students on a day-long excursion. Some examples included seeing a museum and GG bridge, and visiting Stanford & Cal. We pick them up from BART around 5pm.
• They leave the following Saturday morning.

Effectively, you hang out with them for 6 evenings. It’s not a big commitment, still we make it a hectic week. We take them out to dinner (burger night, bbq night, taco night, take-out night where we get pizzas from multiple places for a taste test), go bowling, host gatherings with Japanese-speaking friends (we did that on 2 separate nights). We take them shopping as they always want to buy gear. The Dick’s Sporting Goods excursion has never failed.

Navigating the language barrier is part of the adventure. The upside of this is the bonding. It is remarkable how memorable both Yinh and I and our boys find this. They still refer to Mihiro and Tomonuri who we hosted in 2023. In fact, the boys stay in touch Yinh via IG and even reached out when we posted the photos of our latest guests.

There’s a ritual where the students give gifts from Japan and share the notes their parents send. This is one of my favorite things…to read what someone says about their babies that they send over. Neither of our guests had ever left Japan until this trip. Imagine writing that note.

We send them home with lots of swag and notes back to their parents telling them how well-mannered their sons are (which is impossible to exaggerate). It’s delightful to hear about their families, upbringing, what they want to study or do when they grow up. And of course, to see the questions and thoughts it prompts in our own kids. After the 2023 visit our boys wanted to learn a foreign language because when they saw their Japanese friends talking to our visitors, it looked like a superpower. Since then, they have been enthusiastic students of Vietnamese and now have a secret language with mom and grandma that daddy doesn’t understand.

I could go on, but it’s one of those things that you either think sounds cool or doesn’t, I just want to remind you that it exists. I think it’s great for families with kids, but I also noticed that there’s a lot of empty-nesters at the pickup. Not a bad way to bring the sound of voices back into a house that’s too big for a couple.

Oh and a fun thing I just learned yesterday as we were chatting about our guests with good friends who live in Texas, who also had a memorable bond with their Japanese students: this summer when visiting Japan for their son’s baseball tourney, their students’ whole family flew to see them and watch the games!

Money Angle

My wife has a pet project that involves very candid conversations about money matters with other women.

Think of today as a PSA born from a bit of advice she gives surprisingly too often:

Do not have meaningful amounts cash sitting idly in a bank account.

Outside of the cash you leave in your checking account for covering regular ebbs and flows in receipts and expenses, keep any extra cash you don’t want to invest in T-bills. Especially, if you live in NY, CA, NJ, etc.

T-bills are state-tax exempt, but high-yield savings account are not.

You can buy T-bills through most brokerages (I’ve taught so many people in my extended family how to do this) .

Alternatively, you can buy short-term T-bill ETFs like BIL, VBIL, or SGOV. You can buy ETFs just like you buy stocks — through your brokerage as well. The interest is paid via monthly dividends and it’s still state-tax exempt.

A woman told my wife this week — “I think talking to you just made me like $10,000.”

The wife’s project reminds me how many false assumptions I have about what is common knowledge around money.

Money Angle For Masochists

Ilia Bouchev ran oil trading for Koch for over 20 years. I’ve traded oil and related derivatives more than anything else in my career. This interview with Rory Johnston is terrific. Ilia is giving the straight scoop, so you should just listen if you are at all curious about oil trading.

Just one brief comment from me:

Ilia talks of fundamentals still mattering, but you are mostly trading the “reaction function”. I think this is a great way to understand equities trading. It feels like it’s all flows and reaction function because the realized fundamentals are so far in the future, beyond the horizon of useful feedback loops if you are trying to trade on fundamentals.

[One can invest on fundamentals, meaning underwriting some far future of the world, but not with the signal-to-noise you can verify from high turnover trading strategies.]

From My Actual Life

While our exchange students bid us farewell yesterday, this week, much of my east coast fam is visiting to celebrate a cousin’s wedding in Napa. It’s a nice season to get married. In fact, Yinh and I celebrated 16 years on October 2nd 🙂

I mentioned my wife’s pet project about money matters. As you can imagine, how couples deal with money, joint accounts, budgets is one of the main themes.

I’ll share a little about our approach to finance in no particular order.

Do we have a prenup?

Nope.

We both started with nothing but college debt. Neither of us is in line for a meaningful inheritance and in fact both provide financial support to at least some of our parents. We met on the day I turned 25 and she is a few years younger. We didn’t have an imbalance in career prospects like me being a trader and her being a teacher. We both had real upside. I say that as a backdrop for why we wouldn’t even have considered a prenup. We felt like we were in similar situations. But this left-brain explanation is secondary to just — being against the idea. Classic YMMV situation.

Do we have separate accounts?

No. There is literally no concept of mine vs hers. That even goes for spending. I ordered a $300 guitar pedal yesterday and told her because I feel compelled to tell her anytime I spend say more than $100 on something that is only for me. Her reaction every time I do that is, “If I told you every time I spent a few hundred bucks on something for myself, you’d be upset”.

Which brings me to…

Do we have a budget?

Wellllll…it’s more like guidelines.

7 or 8 years ago I did an exercise…I reviewed all our spending for a year. Yinh called it The Audit. I wanted to understand what it cost to wake up in the morning the way we were living. We looked at where we were spending to decide if it was in line with our priorities both in the consumption sense (was X dollars on travel acceptable) and in terms of our savings rate (or what I think of as giving our future selves a say in our current spending).

The value of the exercise was mostly understanding where our money was going so that in the future we can know if and how much creep we were allowing. The knowledge was useful because it was a chance to “sign off” on how things were going. We deemed the pressure it put on us acceptable with regard to our wider financial picture, prospects, and ambitions.

The exercise also had an unanticipated benefit. It stopped me from caring about any single transaction. If you don’t do the exercise it’s hard to put the splurge in context of how much it moves your annual nut. If Yinh’s self-care expenditures dwarf the cash that I spend on myself, but we’re already ok with the composition of our overall spending then why should I care? We’re on track.

It’s changed my entire neurosis about money. I quote Walter all the time: “I’m shomer shabbos…I don’t handle money”. As long as I feel like my spending habits are in line to what they’ve been, I don’t think about day-to-day money. Yinh is the one who looks at bank balances and credit cards regularly (part of this is admittedly good hygiene — catching errors etc, but part of it is to satisfy her money neuroses).

I only review everything during tax prep season. This gives me the chance to see if my “feeling that my spending habits” are constant is well-calibrated. Instead of giving money daily mindshare I give it a dedicated time for review.

Who manages our investment portfolio?

I handle the general portfolio allocation. I track the running portfolio vol and correlations for public/liquid investments. About 2 weeks after each quarter end, I update the marks on any private funds, and record all bank balances. It serves as a quarterly net worth check-in.

[For angel investments, I don’t update marks unless there’s a downward revision. Marks are at cost. Never up.]

“Taking the pulse” every quarter is more of a Yinh-requirement than mine. I’d be fine with every 6-months and very likely just every tax season. However, I think you can spot red flags in private funds if you look quarterly, so it’s easy to agree with her without feeling like I’m just patronizing her neurosis.

Investment ideas can come from either of us. I just manage the asset allocation around whatever we add/subtract.

For investments that represent less 1% of assets we don’t really need to discuss them, but we usually do anyway. We’re both curious about investing generally which is probably not going to be the case if 1 or zero partners is in finance.

Who is more spendy?

For ordinary matters, Yinh by far. With my family coming this week she wanted to rent a mechanical bull and tequila donkey or something for a backyard party. I’m the circuit breaker. I put the kabash on that. Instead, she bought Tornado foosball table off FB marketplace. Facepalm.

She’s definitely the minister of fun on regular life. The Japanese exchange program was even her idea.

My wiring is too ascetic. On an intellectual level, I think that wiring is faulty, so I appreciate that she’s this way. I push back, we land somewhere in the middle, both finding an acceptable mix of responsibility and joy.

When it comes to big-ticket items, I’m the spendier one. I was way more comfortable with budget for our new house. I pushed for a larger budget for the wedding. We are already going over budget on the ADU design and Yinh is the one imposing discipline.

I don’t have any convincing hypothesis for the difference in our biases.

(For mine, I’d guess there’s some sense that spending big on non-recurring items feels like less of a lifestyle-creep risk than frequent, smaller splurges. I’m not even convinced by that logic though.)

Microcosm of marriage

Differences abound. If your relationship is worth it, you make them manageable. Disagreeing on that fact is the only difference that cannot be managed.

Seeing your partnership from the facet of money is a reminder that you didn’t marry yourself. And that, my friends, is worth celebrating.

16 years from this day…

I get this…

That’s me and my 9-year-old playing on a stage together for the first time.

There’s no mystery about what I’m supposed to do in life. Resolve to deserve what I have. I’ll never get there, but that’s the type of goal that keeps me alive.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• seeing through AI investment hype
• when vertical spreads are traps

   

Friends,

For Friday’s family pizza/movie night, we finished watching the 1978 Superman starring Christopher Reeve. It’s one of my favorite movies, so I was nervous it would feel too outdated to the kids, but phew, they approved!

My older kid likes rocks and crystals, so he loved the “programmable” sunstone that acts as a telecom, computer, and data storage in the Fortress of Solitude. My younger kid was pre-inclined to like the movie because he knows his middle name, Kalil, was derived from Superman’s Krypton name, Kal-el, with an Egyptian twist.

My love of the movie is not just nostalgia, but the myth. The struggle Superman lives with. The tension between power and restraint. He is explicitly told by his biological father, Jor-el, not to interfere with the human course of history. When Lois’ car is swallowed by the fissure, Superman, accepting that he cannot revive her, is torn. The wise father’s warning weighs heavily on the man of steel, but is ultimately overwhelmed by Superman’s mortal emotion — the pain and regret of allowing his Earth-native step-father to die of a heart attack within earshot of him on the farm.

Superman’s response is profoundly human. He rationalizes his step-father’s words, “you must be here for a reason”, to mean “I should save Lois”. A goal that’s hard to argue against as bad, yet conveniently flatters Superman’s romantic self-interest.

He’s not a god.

That’s the first moment in the film when he’s wearing the cape that he’s relatable to the rest of us messy creatures. (Clark’s dramatized bumbling makes him cringefully-relatable and Reeve’s portrayal of the awkwardness is, as the kids say, “S-tier”)

There’s more to love in this movie. Namely Gene Hackman’s Lex Luthor. He’s a magnetic mix of wry humor, brazen arrogance, flowery proclamations, and dapper style. From the ornate, booby-trapped Grand Central station lair, complete with an indoor pool, to the most elaborate master-villain plot to…make a killing on real estate.

Wait, what?!

The imbalance is breathtaking.

The feat of imagination required to subdue Superman with kryptonite, hijack 2 warheads, one as a backup plan to distract Superman in New Jersey, and the other to send CA into the Pacific by triggering the mother of earthquakes along the San Andreas Fault…so Luthor’s central valley land purchases would become valuable resorts on the new waterfront “Costa del Lex”. Really. This is the long game.

You have to laugh.

Have you ever seen Lex and Trump in the same room?

(Ok, calm down)

The self-proclaimed “greatest criminal mind of his time”, Lex mobilized earth and sea for something that barely rises above a CA political scandal.

[The plot echoes the early 1900s corruption and land speculation around CA water rights. The “water wars” were also the backdrop for another film I love, this one, 4 years earlier than Superman — Polanski’s Oscar darling, Chinatown, starring Jack Nicholson.]

Really, if Trump did nothing but use the presidency to make his family billions in crypto pumps and bribes, it would be quite Lex. You re-arranged humanity to…make a quick buck??

Ya know what, when I put it that way, it seems British historian Arnold Toynbee was almost right. “History is just one damn [real estate scheme] after another”.

In related news, we were shaken awake last Monday at 3 am by a 4.3 earthquake. The number betrays the experience. It was in Berkeley, less than 15 miles west of us. It was the strongest quake I’ve ever felt, although I’ve only been in CA for 13 years. [I couldn’t feel the large Napa quake from where I lived in SF shortly after moving West.]

The silver lining: doing math at breakfast before school. We talked about the Richter Scale. I explain the difference in relative strength by saying that the number represents the quantity of zeros. So a 7 has 3 more zeros than a 4 (1000x stronger).

🔗Related: What I learned about earthquakes from Nate Silver’s “Signal and the Noise”

Money Angle

This pic is from a tweet saying, “Honestly some of the best life advice I’ve ever heard.”

I’ll stop short of ranking life advice, but this one was timely because it was a not-so-subtle lesson in what I was trying to teach my 4th grader.

Here’s the backstory:

His class has an economy. Fake money you can earn for achieving certain goals. You can use the money to bid on monthly auction items which are provided by the students themselves. Your kid is now looking around the house for stuff they can sell.

You also have to make “rent” on your desk which is a way to force students to participate in the capitalism of the classroom economy. (The idea that a CA public school teacher might not be Marxist must be a narrative violation, but I’m reporting from the field that there’s more to reality than memes.)

So what happened?

Max came home upset and complaining about how the day’s auction went down. One of the kids paid a price far higher than anything has ever traded. (The auction item was a Labubu — I only know what that is because of South Park).

Max says it’s “unfair” because the other student apparently discovered the website that the teacher buys the fake money from and bought a bunch of it himself.

My immediate internal reaction was “great, this is an opportunity to talk about lots of important stuff” but first I had questions.

Did the teacher notice this increase in the money supply?

I got no satisfactory answer from Max on this, casting doubt on his allegation. But if the allegation is imagined, I’m probably raising a supervillain. The irony tracks.

Isn’t a Labubu worth more than the amount of classroom money it garnered at auction once you adjust for the price it costs to buy the classroom money online?

Almost certainly.

Whatever kid sold the Labubu might need an economics lesson. Or they stole a siblings’ toy and arbed the fact that the COGS were $0.

In any case, the inconclusivity of the answers don’t materially affect the conversation I had with my kids.

1) Address Max’s sense of justice

Look, if the kid really bought currency online, it is wrong because it’s not in the spirit of the rules. If the teacher thought fine print was necessary, this would have been covered. We’ve talked about values recently. Disagreements often come from the different weights people assign to certain values. In our household coat of arms honesty, in its many forms, is a chief value. Cheating a game that isn’t about winning but educational is poor form. It’s one thing to find disagreeable edges when that is part of the meta, but this is not the wild.

I don’t judge the alleged perp either because discerning between a clever gotcha and anti-social behavior is so clearly difficult that we can fill a daily Matt Levine column about high-profile examples in finance on a daily basis.

Max, your sense of fairness is well-calibrated. I don’t want to dismiss that.

Yet, you can’t let the injustice paralyze you. Instead, given what we know, how can we turn this situation to our advantage?

2) Diagnose the situation

What do we know if Max’s version is correct?

• The money supply is larger than the teacher intended but the situation was left unaddressed.
• If the money supply keeps growing, especially because of one kid who can easily be traced to as the source, it will break the classroom economy.
• The teacher will need to intervene. Interventions would likely include better tracking of the money supply to get it under the desired control (I’ve spoken to the teacher in the past and know they regretted how loose the money supply was in the first year they did this).

In other words, money is temporarily oversupplied. It is “cheap”. You get a lot of it per good sold. If the money supply tightens, it becomes more valuable. How do you buy money while it’s cheap?

3) Give the market what it needs — stuff

Sell this kid what they want. Not Labubus, of course, since that would require arbing yourself but maybe 3-D print Labubu accessories. Or find out what else the kid is into. You gotta move fast because the money isn’t likely to stay this cheap.

Later, when taking the older kid to hoops I brought up his brother’s school drama. I set-up the situation and he immediately understood that you wanna just make this kid a customer while the getting’s good.

Being a bit older, I could explain to him that this was “inflation” or too much money chasing too few goods. That in the real-world, this is a signal to be an entrepreneur and create “supply”.

An excessively cheap cost of capital, the flipside of high valuation, also summons scammers and frauds. The market’s lack of fiscal discipline and TINA mentality was bidding for a story in the late 2010s, and there will always be unscrupulous opportunists eager to fill the order.

Some people will become crusaders against injustice. To do it well, you need fortitude and focus. The focus thing is key. Specialization even. A sign of a true crusader is what it costs them. You might disagree with Snowden, but the price was real. Getting rich under the banner of a justice crusade rightly puts the burden of “is this a grift?” on the crusader.

[“Keyboard” crusaders are everywhere. It’s human. They get the “likes” from people who already agree with them for free. For words. But this activity is amplification, not crusading, especially if they are on to the next crusade just as easily. I take it more seriously when the crusader is a specialist and not donning the “constitutional scholar” costume while their legs go numb on the toilet.]

The beauty of capitalism, notwithstanding its distortions and backdoors, is that it allows pro-sum, pro-consumer crusades without the temptation of weaponizing ethics.

We are in a strange place as a society where large swaths of people are sus of any profit while another swath is sus of do-gooding, but it’s because the well of profit and the well of do-gooding have both been poisoned by a minority who blend in.

Acknowledging that neither is ever perfectly pure is an adaptive act to rise above the numbing cynicism.

Even Superman was conflicted.

Money Angle For Masochists

I referenced one of Kevin’s articles about funding trades in Thursday’s letter. I have several of Kevin’s tweets saved. This one is a counterintuitive argument for why the stock’s left tail is probably smaller than you think. In a June 9th tweet, Kevin considers one of ASTS insider sales:

Scott W sold 50k shares today. Here are a few things to keep in mind:

This sale was NOT made under a 10b5-1 automatic trading plan.

Many insiders use 10b5-1 plans that pre-schedule sales based on price targets or preset dates. The benefit is that these plans are adopted well in advance and help shield the insider from allegations of trading on material nonpublic information (MNPI).

Since this was not a 10b5-1 sale, it appears Scott made a discretionary decision to sell, likely recently. He sold about 10% of his holdings, which is a very reasonable action for personal liquidity or diversification.

Importantly, if Scott were aware of materially negative, nonpublic information (e.g. major technical failure, regulatory issue, or business disruption), securities law and internal compliance would typically prevent him from selling. Doing so could expose him to legal risk and internal disciplinary actions.

So while insider sales are typically not a bullish signal, this one significantly reduces the probability of catastrophic near-term news…the idea is the left tail is less likely to occur due to the insider sale, so it makes the left tail worth less.

The thread caught my eye because it’s a neat example of an action that affects your opinion of the tail more than the heart of the distribution. The sale likely has no influence on general bullishness/bearishness but there’s a good chance an insider wouldn’t want to be seen selling shares off-cycle right before some terrible news came out and if they were willing to take that risk in possession of MNPI it doesn’t really make sense to do so with a token amount of shares.

For whatever it’s worth, ASTS is up about 41% since June 9th.

For a frame of reference:

ASTS is about a 100 vol name.

It’s been 76 biz days since June 9th or .30 of a 251-day year.

For a 100 vol name, 1 standard deviation is 100%*√.30 = 54% so the move is well within the range one might expect given its vol.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

• “killing our society”
• the messiness of options in the real world

Friends,

My friend Khe has been working with hedge funds and Wall Street firms to help their teams get more out of LLMs (his weekly letter How To Future-Proof Your Career with AI is consistently practical. On a personal note I feel like Khe’s cadence is about 1-month ahead of my own LLM-discovery arc. I’m just getting started with Claude Code this week).

Khe’s is running an AI Accelerator program in October.

🚀Details and registration

I feel compelled to volunteer that while I will host ads in Moontower this is not an ad. I asked Khe if I could tell my readers about this because I hear the same thing he hears from many people in finance and heck, even in my extended family: ​“Everyone talks about AI, but I still don’t know how to use it effectively in my day-to-day work. I feel like I’m missing out on something that could make me 10x more productive.”

Let’s talk about this a bit broadly.

I don’t consider myself a power user of LLMs compared to say devs or Khe who are building agents over their entire file systems (I’m not there YET, but Emi is giving me a tutorial soon!) but you can probably notice how much use I’m getting out of them in the work I have been sharing here.

I’m not comfortable saying it because it sounds like bragging, but I’ve had more people ask me how I’m able to produce “so much” especially this year and part of it is just the natural leverage embedded in these tools. I’m using them as tutors, research aids, sparring partners, summarizers, and the “connective tissue” of writing ideas not too mention all the vibe-code projects.

A few other examples:

• My 12-year-old and I are collaborating with Claude to prototype a physical game I want to publish.
• This week my 9-year-old is using ChatGPT in a loop to give it pictures that he draws, asks for feedback on how to improve the shading and lighting by words and example and then he goes back and tries to mimic it.
• I have a Claude project where the LLM knows all my guitar gear and I can ask it how I can replicate the sound of particular songs. It provides the signal chain and suggestions for what effects I should get to make my set-up more versatile.
• ChatGPT is helping not just with decorating but home maintenance crap. Well, while it did help me change the cartridge that blends the hot/cold in my sink faucet, it wasn’t until a simple Google search revealed that my problem was that my Delta 20 faucet batteries were dead. New house, new times. I never considered that a faucet takes AA batteries. I figured the LED & touch functions were powered by a plug.

While on the topic of AI, I’ll eagerly admit that it feels like every time I use it I’m training my replacement. I’m also rewarding companies that are so flush with funding that they can brazenly play the “ask for forgiveness, not for permission” game and account for IP lawsuits as COGS.

But I’m what Huxley warned of. The citizen who invites his colonization by embracing the products. I want certain things to exist. These tools lower the cost of making them. I suppose my revealed discount factor to the specter of being replaced is extremely high.

Something that might sound a bit weirder, which I’ve admit in a few private convos: I look forward to “replacing myself”. I make the stuff I do because I want it to exist but doesn’t to my satisfaction. If it did, I’d do something else.

I was just talking to a friend who has no background in robotics but is working with an engineering team at the intersection of AI + robotics on the business side. I felt kinda jealous. I probably get that feeling a few times a month. There is so much work that sounds fun that if I weren’t doing the things I prioritize now, it wouldn’t be hard to find something else to do. I wish I could copy myself. If everything on my current strand of thought were created, I could feel liberated to move on to something else. Be a beginner elsewhere.

Like if you’re a radiologist and you saw a path where technology could make radiologists unnecessary, would you root for it or would you protect your job? Of course, the necessity of making a living compels you to protect. I’m not judging that. The priority for anyone is survival. But if you removed the constraint, you’d likely conclude that there are many ways to use your humanity; why be attached to one that overlaps with a machine? The radiologists who “defect” and go train the machines are like the market-makers who tightened the spreads (the game theory bit towards the end of the art of paranoia applies far beyond trading).

Your own value will be maximized where the machine can’t compete yet. Protection is ultimately delaying your own growth unless you plan to have your career outrun adoption. That’s probably fine if you’re 55, but if you’re 40, it’s a tougher question. It’s impossible to hand-wave the constraint of making a living. But here’s food for thought (food that is probably not going to nourish anyone whose already mid-career or older but might timely for college-aged or 20-somethings):

Living below your means, or having cheap tastes (which is easier to do before lifestyle-creep moves in) is a valuable option. And what maximizes the value of an option?

Variance.

Look at the world. The internet is a volatility pump. Connectedness, the reduction of communication/info friction led to acceleration. Having a buffer makes you less fragile. More mobile. Closer to just-in-time adaptability to where opportunity is. Less protectionist. Less defensive. Less calcified.

As we learned from Wednesday’s making the most of your time on earth, everyone has different values. You may not value any of the things I’m referring to above*. Totally fine. One of the things I got from a Straussian reading of the Welch stuff is how so much of our disagreements come from different starting values. Given that the source of values is probably more random than anyone wants to acknowledge (birth lottery and who you happen to hang out with in formative years), we are really left with different guidebooks for everyone. The best I can hope for is my perspectives landed for some of you.

*I didn’t share it in that post but my top 4 values on the values bridge assessment are below. Belovedness is about the primacy of your partner relationship and family-centrism were high — it feels horoscopic, I personally think the exercise of doing the questions is better than the output. The “voice” and “non-sibi” explain the newsletter, I guess.

Money Angle

Speaking of partner, this week was a rare public glimpse of the investment manager my wife works for — Eagle Capital. They are private manager but in 2024 they launched a public version of their portfolio, EAGL. I believe it was the largest ETF conversion to date when it launched. Of course this is where we get most of our beta and it’s the only ticker my kids probably know.

One of the heads of the investment team, Adrian Meli, went on Ted Seides show and I hear it was one of the most listened to episodes despite the vanilla category of “long only” investment manager.

They fly under the radar but I know many on the team. Very clever cats. When you hear Adrian you’ll understand.

🎙️Adrian Meli on Capital Allocators (link)

When Yinh asked me how I thought it sounded, I said “it confirms what I suspected — I wanna work there. Glad you do.”

Gamma: one rung at a time

Last weekend I shared a delta hedging simulation tool where anyone can learn exactly how long gamma mechanically lets you “buy low and sell high” for the cost of theta. I made this video Monday to step through 30 days of simulation to break it down as much as humanly possible.

Money Angle For Masochists

Yet another vibe-code project. This one went viral because…it’s a game!

It’s a replica of the one we trained on an eon ago at SIG. It’s a put-call parity game.

The formula for put/call parity is:

C = (S - K) + P + RC

where:

C = call value

P = put value

S = stock price

K = strike price

RC = cost of carry til expiry (ie “reversal/conversion” value)

In the game you are given the strike price and 3 out of 4 of the remaining variables. Solve for the 4th. The game is timed.

Try it for yourself:

🕹️Put-Call Parity Trading Game

Contextualizing the formula

You don’t want to just raw-dog the formula. You get faster if you can contextualize it because with practice your mind collapses multiple operations into just one or two. You need to try it for ahwile to appreciate what I mean.

But let me give the context.

1. First, note that (S-K) is just “intrinsic value”. If positive, the call is in-the-money, if negative, the put is.
2. The extrinsic portion of the ITM [call/put] is the value of the OTM [put/call]
3. For calls, we add the rev/con (ie cost of carry) for puts we subtract it

Contextualizing the game

The game spread quickly when I shared the link on X. I even had some more recent alum of SIG and one from another MM tell me even in recent years they use a game like this in training.

When I started in 2000, this game was actually in fractions (“steenths”) but decimalization pilots were happening in my clerking months. Even though I started on fractions, I was doing decimals about halfway through assistant year. As clerks we were supposed to play this game when things were slow so you could be fast in mock-trading in class after work so you could actually get selected for the bootcamp (which alone got you a raise) and get on with a trading account.

Speedy mental math was more important back then. Different era obviously, but interesting that they still find use in it. I could speculate as to why but maybe someone reading this will give me the official reason. I would admit that even when I’d get a broker look at an outright option when I was at Parallax I’d automatically do the calc in my head to compare to the same strike option on the chain. Being facile with the calculation was also a requirement on the rare occasion that a broker asked for a synthetic (a topic I discussed in the art of paranoia as well).

It only took about 20 minutes of iteration to make the game with Claude. Which is not much longer than it takes me to play 🙁

I used to get perfect accuracy in the 30-40 second range at my best. My friend Tina was the firm champ at about 18 seconds. Just over 1 second per question.

Being fast was a job requirement, but you knew who the aliens were. It’s often hard to appreciate just how steep the performance curve is at the right tail of any skill in a competitive domain. We tend to get a glimpse of it in sports where everyone knows someone who was extreme (a friend of mine who was top 50 soccer player in US college soccer, another friend whose sister is bottom half of the top 100 tennis players on the women’s tour) but readily concedes there is still a world of difference between them and anyone famous in the field.

The trading floor was a humbling place because it’s very obvious that not all synapses are created equal. The strategic inferences and therefore actions you make with this information is heavily modulated by how much self-awareness you have. Sometimes being overconfident comes from never being exposed to the right-tail (your local big fish in a small pond) but it also comes from not realizing how far apart 2 standard devs is from 3 standard devs is in probability space.

[I tried to teach my older kid this idea recently in the context of his math MAP score. He is 99.5 percentile for 7th grade fall testing. He has a friend that is 99.8. Sounds similar. But my kid’s score is 5 in 1000 or 1 in 200. His friend is 1 in 500. In the population of Bay Area burbs with a good public school ranking, my kid is more like 1 in 40 and doesn’t make the gifted and talented cut, but those extra .3 percentiles keep you in the 99th percentile of the local pool.

99.8 vs 99.5 is 2.5x more rare. Proportionally, those .3 percentile points are as wide as being in the 50th percentile, or 1 in 2, vs the 80th or 1/5. That range covers 30 percentile points!

The extreme is yet steeper.

99.9 percentile is half as common as the 99.8…almost a similar jump in rarity from my son to his friend for just .1 percentile points.

💡See Tails Explained to see more application to everyday reasoning]

If you do Tina’s morning routine, you’re not gonna be Tina. It’s more obvious when the Tina’s of the world look like Lebron. But don’t be fooled when they don’t. Figure out the games you can win. Playing to your strengths is wisdom but first you must identify them. Self-awareness means stop wishcasting, see reality, and adapt to it.

Stay groovy

☮️

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