Friends,

We just renewed our lease through August 2026. By the time it ends we will have been in our rental for 6 years. We’d extend if they let us. I have family renting next door and we took down a section of the fence between our houses so it’s like a single compound with 4 cousins and grandma all in the mix.

It’s one of those situations that we never take for granted. We’ll look back at these years with a nostalgia I can’t fathom.

However, my in-laws would rather own than rent. I’m always trying to make them feel better about the money they’re saving.

[Just to scale the numbers, we live in the equivalent of a $1mm house and pay $2,300 in rent. Property taxes here are 1.25%, insurance is .50%, and home maintenance costs are choose your own adventure but in a place that starts at $650 sq/ft to build, you can fill in the blanks.]

So I send them these so they can do their own computations:

• Nick Maggiulli’s Rent vs Buy Calculator
• NY Times Calculator. This one has been around for a long time and has a few more bells and whistles although Nick’s is good enough.

However, buy vs rent is far from a pure financial decision. There are other weighty considerations.

Which brings me to Khe’s new calculator which, in addition to the numbers, asks a few survey questions which get fed into a black box and spit out a score from 0-100 on whether you should buy or rent.

It only takes a few moments to do it:

Rent or Buy? Make the Right Decision

Tagline: Most home ownership calculators make a big mistake – they don’t account for all your preferences. We fixed this for you.

I did it with a bunch of people and for the most part the answer it gives was pretty decently calibrated to what they expected.

I scored a 29, which is a bit high, I expected more like a 20. But I think having a semi-strong desire to customize my home pulled it up against what I think were values that point towards renting.

Khe will calibrate the weights in the calculator over time as he gets more feedback. A good question to add: “How liquid is the supply of rental homes in your area?”

The main reason we’d bite the bullet and buy is because the rental market isn’t liquid. In a city this wouldn’t be a concern.

[I remember many years ago a long-time SF trader telling me that “every landlord in the Bay Area is secretly a seller” and while that’s not 100% true it’s easy to understand if you can add and own a brokerage account. He was renting one of those amazing Pac Heights mansions for a number that probably couldn’t cover the taxes if they weren’t Prop 13 protected. “Rent-control for rich people” is the kind of self-own SF prides itself on.]

My in-laws scored in the 70s on the quiz. Our family arrangement is on borrowed time. Maybe I like them more than they like me?

That’s ok, I love you guys, please stay!

[If they do decide to buy, I intend to engineer my next neighbor. I’ll put out a call for applications. Must be ok with us sauntering over with a boardgame and opinions.]

Money Angle

QVR’s Benn Eifert continues to be the best translator of options to normie speak. All of his podcast interviews are full of useful knowledge about options and asset management practices.

His latest appearance on Odd Lots is no different.

I excerpt my favorite parts with my emphasis at times.

1. Buffer ETFs and the Related Structured Product History (UConn Story & Cost of Predictability)

Question: I saw a headline float by about the University of Connecticut’s endowment dropping some of its hedge fund exposure in favor of buffer ETFs. What are buffer ETFs?

Benn Eifert: “So this is a big new manifestation of a relatively old popular idea. So buffer ETFs are usually pitched as sort of defined outcomes in some sense over some time period where they say, well, what you’re trying, what we’re trying to do is give you equity exposure, but you have protection, you have a buffer down to say 10 or 15% where you’re not gonna lose money as the market goes down. And then beyond that point, you’re exposed. And in order to do that, you’re gonna sell an upside call, you’re gonna give up some of your upside. And so what this is, it’s basically just a put spread collar, which is a very standard kind of option structure where you sell a call to buy a put spread that is for many, many years and decades by far the most popular thing that a Wall Street derivative salesperson will run around trying to pitch to their clients.”

One thing I don’t get is like, why would you prefer doing that versus just buying a bunch of equities and maybe hedging in a more traditional way like buying some bonds?

Benn Eifert: “So this is exactly the right question. So the first thing that, you know, a derivatives person looks at when you look at a trade like this is, okay, what does this do to the delta, the equity exposure of your position, right? So if you buy some equities, that is a one delta—a derivatives guy would say it’s just a delta one position. Market goes up a percent, you make a percent. If you trade a typical put spread collar against that, you buy a put spread, you sell a call, you’re probably gonna take that one.

And so if you do that kind of a trade, you might take your one delta option down to like a 0.6—down to a 60 delta. So now you’re only participating kinda 60% in the movements of the market. And if you look at how these kinds of trades perform over long periods of time, they actually act a whole lot just like having sort of 60% as much stock, right? Because ultimately they’re rolling these—it’s not really like a buy-and-hold-to-maturity thing. It’s like they’re rolling these options to kind of maintain this kind of exposure. And if you were just to take the counterfactual, which is why don’t I just own 60% as much stock and put 40% of the rest in T-bills? Turns out your fees are way less and your performance is probably better.”

Are there institutions, you know, Tracy mentioned the University of Connecticut… are there certain types of institutions where this is in alignment with the institutional mandate?

Benn Eifert: “So there are cases when that’s to some extent true, at least with some kinds of derivative structures. So you’ll have cases where there’s like a big disbursement that has to be made at some future date and they wanna lock in for sure the fact that they can make that disbursement, but usually something more like an outright put is gonna be a better match for that. Right? ‘Cause the thing about the put spread or the put spread collar is you’ve only got like this say 10% buffer of protection, and what if the market crashes?”

So this, if the stock falls or if the market falls 25%, which does happen, you are actually not protected against all of that.

Benn Eifert: “Yeah, exactly right. Yeah. So this stuff really doesn’t lock in defined outcomes to the downside. It just gives you kind of some buffer of protection in exchange for some upside that you’re losing.”

You touched on this earlier, but talk to us a little bit more about the commissions and the execution and whether or not you’re getting a good deal on those.

Benn Eifert: “Yeah, no. So this is a really important point. Generally, these are not always, but typically these kinds of structures exist in fairly popular, fairly liquid underlyings, right? This isn’t like micro-cap stocks, this is S&P or something. So the bid-offer spreads don’t look that wide when you look at it. But you have to keep in mind if you have a $22 billion fund that once a quarter is rolling this giant collar and everybody knows about it and knows exactly what you’re gonna do and knows exactly when you’re gonna do it, then obviously the market just moves right ahead of you, right? And everybody positions for this trade that you’re gonna do.”

[Moontower take: this is well-aligned with my broad view that the inputs into an option price mean they are surgical tools — they are highly levered to the specific inputs. Strategies which use them with little discernment as a blunt instrument are poorly matched to why they’re useful at all. I wouldn’t die on that hill because I can imagine a very good argument for using them in a systematic way but the details matter and my point would be that the argument would indeed need to be very good to overcome my prior. The hooker asset management world often just sees a new trick where they can hide behind “I’m giving the customer what they want, that’s capitalism” but generating demand by playing framing games is zero-sum. Of course I’m biased, every time a person who makes their money in marketing outbids an option trader for a house my pen gets saltier.]

2. Benn’s favorite blow-up story

I think possibly my favorite was Allianz’s Structured Alpha, which blew up in 2020 in March. And the reason was, you know, Allianz is a huge sort of safe conservative firm that everybody would look at and say, ‘Oh, they would never be doing something kind of crazy, right?’ Because it’s, you know, they’re very buttoned up, they’re very serious people. They own PIMCO, and so they—but they had these French kind of option traders…”

(Joe Weisenthal chuckles at “French.”)

Benn Eifert: “Yeah, it’s always the French. There’s just something in the DNA.”

“And, you know, they were doing something where they would effectively, they would usually sell downside put spreads—they’d sell a put, and then they’d buy back a lower strike put. That was the main thing. They’d do a few other things, but like, think of that as the core thing they were doing. Right? And that’s kind of safe-ish, right? You’re getting some credit, you’re earning some premium, but like, you’re supposed to know how much you can lose.”

“And then—but the returns were pretty good. They actually kind of kept up with equity markets, which doesn’t really make a whole lot of sense. And it turned out the way that they were doing that was that they were just not buying back the downside put—or they were buying it back but like way, way, way lower strike than they said they were buying it back.”

Joe Weisenthal: “Oh, that sounds really bad.”

Benn Eifert: “Yeah, that was really bad. And they were doing that for years and years. And it’s actually really great—there’s a whole SEC complaint about this. You can read all the details. They had to show this to investors, what they were doing, right? Because that’s part of the business. And so they had spreadsheets with all these hardcoded cells and made-up numbers to sort of be able to lie to investors and say that they were doing what they said they were doing, when they weren’t.”

“And because that’s complicated to manage—to have all these big spreadsheets faking your returns and faking your risk and everything—they actually had a Word document with an 18-point list on how to do all of the lying for all their analysts to be able to follow. And, you know, instructions on how to not hover your mouse over a formula… because the investor might see that the number was hardcoded instead of a formula.”

“They didn’t have some sophisticated methodology for this. They literally just typed the numbers into the spreadsheet.”

Joe Weisenthal: “You don’t even need to be French to do that.”

Benn Eifert: “That’s right. You just go to cell C6 sometimes and you just overwrite the number.”

“So what happened was they sold lots of VIX calls with the front-month futures at about 25. And then the front-month VIX futures went to 85. And so they were liquidated in the middle of March in a huge catastrophic explosion that people like us were shown in an auction and everything. And they drove the relative price of VIX options and futures to twice as high as it had ever been relative to S&P, in this sort of spectacular implosion.”

“They went to zero. They lost billions and billions of dollars for teachers’ pensions and all this kind of stuff in just total and utter fraud. Again, at a very big buttoned-up place.”

“And actually, one of the funny takeaways from it was, in all of the lawsuits, you know, Allianz stepped up and settled lots of lawsuits and paid investors back—you know, all this money, and it cost them many billions of dollars. And so actually, in a twisted sort of way, the logic of investing with the big safe place actually worked but it wasn’t because they managed the risk or had any idea what these guys were doing. It was just that you could sue them, and they would pay you.”

3. The History of Option Selling: Good Until It Got Popular

Benn Eifert: “So from 1990 to about 2012, they look pretty good. They kind of keep up on average with the S&P but on somewhat lower volatility with a little bit lower drawdowns.”

“Option selling looked good when nobody was doing it in size, right? Option markets were a backwater. There were funny little things that a few hedge funds did, and a few kind of people, but there were no giant pension, $200 billion pension funds doing option selling. And then those pension fund consultants started writing white papers and they started pitching to their clients’ boards, and by like 2011, 2012, 2013, they started to get some traction. And you started to have, you know, giant $200 billion pension funds saying, ‘Sure, we’ll put 10% of our assets in, move it from equity into option selling.’ And that grew and grew and grew and grew and grew.”

“And what happened was you see that performance then—in kind of the out-of-sample period, if you wanna think of it that way from a back test—yeah, for BXM and PUT index, which are the benchmarks for this kind of stuff, then really deteriorated relative to S&P where they sort of had very similar risk but much less return.”

4. How to Start Using Options Carefully

Benn Eifert: “Usually the first thing that I do is I send people a thread that has a collection a lot of people contributed to on good reading material and stuff.”

“And then, you know, the next thing that I tell people is what do I think are kind of reasonably safe uses of options that if you really want to dedicate time to figuring this out, you might kind of start with, right?”

“If you want to be really thoughtful about options selling, you know, to try to generate yield over time, there’s ways to do that too. But you really have to read up to understand how to think about the risk-reward of a trade that you’re doing—not just believe there’s something you can do all the time because somebody told you it’s a great idea.”

Money Angle For Masochists

I cleaned up a thread I wrote before NVDA reported earnings Wednesday afternoon. It conveys what I was thinking as I looked at the option surface for the Friday 2/28 expiry.

Thinking aloud as I’m looking at NVDA options before earnings.

My instincts — given the January sell off in NVDA that the stock probably has some discount in the price going into earnings. In other words, if earnings are a nothingburger I’d expect a small rally. No news is good news.

Narrator: I start by announcing my bias. Whether it’s dumb or not is irrelevant. Before you look at a price, chart, option surface you probably have an expectation of what your eyes will see. I probably had many biases. But that one was the most salient before I looked at the option surface.

continuing…

Translating into option speak — the stock is probably going up in terms of “hit rate”.

When I look at the option market, it confirms my bias (not necessarily my reason, but I’m not sure I’ve ever known a reason for anything that wasn’t as tautological as “more buyers than sellers”).

What makes me think the market confirms my “it’s probably going higher” bias?

The downside skew for earnings is fat and the 130/135 call spread is expensive. The market communicates via prices because prices offer odds. You disagree with the market by saying “buy” or “sell”.

How does the price of a call spread tell me anything about the odds?

Start with a simple proposition.

If NVDA was 50/50 to go up or down, you’d expect a $5 wide call spread to trade for $2.50 with the stock at $232.50 which is the midpoint of the strikes.

The stock was $129.50 and the 130/135 call spread was priced around $2.20.

Hmm. Antennae is up.

The call spread has a .15 delta. Meaning if we shift the stock $3 lower from $132.5 to the current $129.50 price, I expect the call spread goes from about $2.50 to $2.05 ( a change of $3 x .15)

So the call spread looks about $.15 rich compared to coin flip pricing.

How do we contextualize how if $.15 in terms of edge?

Well, think go back for a moment and think of the 50/50 case. If the stock was at the midpoint you expect the call spread to be worth $2.50. But if it’s $.15 rich or $2.65, if you sell it what kind of odds are you getting?

You are risking $2.35 to make $2.65 or getting 1.13-1 odds. What does a bookie give on an even money bet? 110-100, right. Empires are built on less edge. $.15 is a lot of edge on a $5 wide call spread.

[Personal opinion interlude: I think this was the biggest insight SIG conveyed to us when I started in the biz. Markets were wide when I was in training and you could get that kind of edge on benign things like call spread. SIG had a reputation for trading big. Using their capital, we were told to get as many lots as we could on every trade. You’re job was to fight for large allocations or splits. The edge compared to the risk on these things was much larger than the edge they saw gambling operations compound on so they optimized for market share. Many less-capitalized firms wanted to maximize edge per trade, which meant they were reluctant to tighten for market share, which can be the right move if you’re undercapitalized.

We were trained to be pigs because they understood that the getting was way too good to last so you want to maximize p/l, area under the curve. So you often pissed everyone off. Our nickname on the floor was “evil empire”*. When you start out you’re reassured “oh, it’s because we wear the black smocks”. But you learn that it’s because we acted like Amazon in a world that still had lots of indie bookstores. You can level whatever you want against Amazon, and they’ll just say “it’s better for the consumer”. Of course what they also mean is — “scoreboard”.

E-commerce and trading are bloodsports. As you learn in trading, in 5 years, you’d kick a grandma down the stairs for the thin margins you’re complaining about today. If you’re young and reading this, the cycle I’m describing is evergreen. There is someone willing to physically fight for your job if you are in a seat with an edge. That you don’t see a fist swinging at you doesn’t mean you’re not in a conflict. The zero-sumness of prop trading is the animating force behind its evolution. If that sounds rough perhaps you’d prefer a career in asset management where “solutions” can be customized to a client’s frontier. Also, if what I’m describing makes no sense to you or sounds dramatic…you’re not in trading.]

Back to the NVDA call spread…

What was my thinking and what did I do?

I didn’t trade it.

I did not sell the call spread that looked expensive. The vol lens said it was expensive, but the prior I had, “the stock is probably going a bit higher” was baked into the option market. If my prior no news is bad news, then I would have sold them.

[Note that the prior is playing a real role here and it was based on vibes. This is a complicated matter. On the one hand, I know why I give weights to my prior. It’s an old habit, that was justified. Was.

In a trading seat, you ingest a lot of unstructured flow data. Which brokers bid or offered a particular option in size? Maybe they passed. Maybe they checked another strike. Why that one? How aggressive were they, have I seen the signature of this flow before? You’re always playing this little deduction game and its output becomes the priors that influence positioning.

Today, I don’t get the same context. It makes me more hesitant. It makes me give more weight to implied odds versus my prior. In fact, with a liquid name like NVDA there is so much electronic flow that perhaps the option surface odds simply reflect a risk premium. Maybe I shouldn’t read too much into the implied odds of earnings call spread and just accept it as the price to clear a flow imbalance as opposed to anything deserving predictive weight.]

Finally, I believe the contrarian trade is probably to spec some way topside call or call spread because that’s the most discounted part of earnings. Probably for good reason, but that also means it’s the more “destabilizing” move. You only get nitroglycerine if everyone is offsides.

The main lesson:

Unlike myself, many of you have stronger conviction stock opinions, so I hope marrying it with what the options market is offering allows you to better pinpoint how you should express them.

🔗Further reading to that ends

• a sense of proportion around skew

 

*Like these guys, I’m an Empire enjoyerrrrr

So much so that I wore a Queensryche shirt when Matt had me on his show.

But I also couldn’t decide which old school empire reference to use so you get my other favorite:

Honorable mention:

From My Actual Life

I did one of my least favorite chores this week.*

I went to the dentist.

The dentist thing happens 4x a year. Egregious plaque buildup due to mouth chemistry and thin gum tissue. Runs in the family. Our holiday gatherings don’t discuss politics or BTC but the latest travel water pik someone’s using or new mouth excavation tool.

I’m not using a water pik these days. Just an arsenal of floss, proxabrushes, rubber tips and the electric Oral-B. Which the dentist reminds me to hold with a light grip because the very act of brushing my teeth wears away my damn gums. Anyway, the dentist trip was fine. It’s been a few years since a deep cleaning and my gums have actually been improving since I started going 4x a year. I haven’t had any gum bleeding in several years as well so while a cleaning is never a treat, I used to dread the cleanings when I was going only 2x per year.

I always think about Yglesias’ Dentists are bad post because like anyone with a set of eyes you can sense that it’s a bit of a racket. I have both a dentist and pediatric dentist in my family so we cross-check all the treatments and prices with them so I feel that I’m only a victim of the baseline scamminess of dentistry and mostly avoiding the upsell.

[Dentist and veterinary services check out as fields where you’d expect PE firms to rollup because they are cash machines mixed with information asymmetries which lend themselves to increasing margins aggressively thru upsells. My sister is a vet but since I have no pets I don’t need to cross-reference her on if I’m being scammed. One of my BILs sold his practice to PE. He used to do a fair amount pro-bono dentistry for people who couldn’t pay in his community. Guessing the new owners won’t have time for that unless it can be deducted as a virtue marketing expense].

*Actually I did 2 of my least favorite chores. I reviewed all my expenses for 2024 too. The last time I did this in great details was probably 7 or 8 years ago. Yinh refers to that weekend as “The Audit”. It’s a giant joke in my family because I was so jarred. And it showed. It actually turned out to be a good thing, because Yinh, being more detail-oriented than I, proactively made some adjustments.

I should emphasize that it was also out of character for me to do an audit. I don’t keep track of spending or bills or frankly daily money matters stuff in any way. If our annual nut is within some general range I don’t sweat the rounding. I’m not a fancy spender in general, so splurges aren’t slippery slopes.

Choosing the “upgrade” hurts for a second for Pavlovian not rational reasons. I counted pennies more when I was younger but by the time you’re older your portfolio vol probably swamps your budget if you continue to be a net saver so if your not a compulsive spender you’ll probably gain some mental health if you stop micromanaging your finances. Although, as I discovered this week, you should probably self-audit occasionally just to catch the recurring charges leeching your bank account.

Stay Groovy

☮️

Moontower Weekly Recap

• the game of school
• a sense of proportion around skew

Friends,

A theme that’s weirdly come up in a few unrelated private conversations with various tech foIk is how it will become very difficult to make money in the future. Like the meme that says you have 2 years to get rich because by then anything you can imagine will be solved with compute (ie electricity) and therefore capital. Labor will be worthless.

It’s a comically reductionist view but its directionality occupies a pied-à-terre in my brain. It’s a messy mental apartment. The thoughts are scattered:

• I remember when the threat of mass automation was contained to autonomous driving. “Truck drivers should learn to code”. Now it’s the hair stylists who are safe (at least until literal robots take over) and everyone with an email job looks cooked. During covid, I wrote about how it felt so unjust that high-paid workers who sit behind a screen not only kept their jobs but thrived while anyone on the front-lines of humanity got ravaged. It was a deeply regressive crisis. At least an EMP tragedy would have been progressive. It looks like the universe now wants to atone for its prior path.
• Interest rates, stocks, and home prices are all at their generational highs. But odds are if you read this letter you live in a town or city where the median homeowner affords their 7-figure mortgage with a W2 email job. If automation is deflationary are the most widely held assets entirely mispriced?
• Is the correct game theory response to loot institutions, pump bags, and discount the value of reputation? Are long-term thinking and “compounding” overbid ideas? (I don’t live as if they are because to believe this requires sociopathic nihilism but I weren’t being paranoid about being sucker I’m probably blind.)

   

I’m harboring all these strange notions. Then, as an example of confirmation bias in real life, Liv’s tweet interrupts my mindless scroll.

 

My interest in the tweet is the part which gestures at market efficiency — “better than any human at maximizing their own capital”. It echoes the theme I opened with — that acquiring substantial capital in the future will become nearly impossible against a master robot race.

(The whole part of creating a human-centric economy is really about political choices. Issues like H1B visas, maternity leave, or how the tax code treats various forms of incomes/costs are the rules upon which American capitalism rest. These are democratically determined even if markets themselves are not democratic consensus mechanisms. That’s not the subject of my musing.)

So this skynet stuff is just floating around my consciousness, then I hear something that sparks a total right turn (not a 180° to be clear). I’m driving back from Placerville last weekend (strongly recommend Marshall Gold Discovery State Historic Park!) listening to Dwarkesh’s recent interview with “two of the most important technologists ever, in any field”, Jeff Dean and Noam Shazeer.

[Some background on them:

Jeff Dean is Google’s Chief Scientist, and through 25 years at the company, has worked on basically the most transformative systems in modern computing: from MapReduce, BigTable, Tensorflow, AlphaChip, to Gemini.

Noam Shazeer invented or co-invented all the main architectures and techniques that are used for modern LLMs: from the Transformer itself, to Mixture of Experts, to Mesh Tensorflow, to Gemini and many other things.

We talk about their 25 years at Google, going from PageRank to MapReduce to the Transformer to MoEs to AlphaChip – and maybe soon to ASI.]

Most of this interview was above my head and I admit my knuckle-dragging self only got halfway through before switching to Marc Maron interview Wolfgang Van Halen but this one section caught my ear before giving up:

One of the big areas of improvement in the near future is inference time compute, applying more compute at inference time. I guess the way I like to describe it is that even a giant language model, even if you’re doing a trillion operations per token, which is more than most people are doing these days, operations cost something like 10 to the negative $18. And so you’re getting a million tokens to the dollar.

I mean compare that to a relatively cheap pastime: you go out and buy a paper book and read it, you’re paying 10,000 tokens to the dollar. Talking to a language model is like 100 times cheaper than reading a paperback. So there is a huge amount of headroom there to say, okay, if we can make this thing more expensive but smarter, because we’re 100x cheaper than reading a paperback, we’re 10,000 times cheaper than talking to a customer support agent, or a million times or more cheaper than hiring a software engineer or talking to your doctor or lawyer. Can we add computation and make it smarter?

This entire way of reducing signal to tokens and computation made me think of investment alpha. It made me think of how financial innovation*, the cycle of hunting for alpha, alpha decay, and efficiency works.

Professional investment managers with teams of salepeople pitch their funds “alpha”. They used to just say “look, how much money we made” but now they have to adjust for beta or some other benchmark. Allocators get smarter. The process is uneven but the waterline of basic aptitude does inch higher. If the market is mostly free of captive frictions then the need for return and the quest to provide it finds a clearing price.

But what does that equilibrium look like in the future? Well, probably something like the way it looks now regardless of how efficient it gets. The paradox of provable alpha is a stable attractor whereby the average person in pursuit of excess returns gets a random number distributed around a fair return so long as they avoid outright stupidity (like investing in levered ETFs for the long haul).

An efficient market feels random. Not to throw another paradox out there but this is exactly what Mauboussin refers to in “paradox of skill”. When the competition is evenly matched, luck determines the outcome. The funds and their marketers who survive all tout information ratios and charts which suggest their alpha, net of fees, is persistent. The best we can probably say about them is they might be good enough such that the claim is a coin flip. If they were deterministically better than a coin flip, they’d be inaccessible or would charge enough to skim the surplus.

But it’s getting into the realm of a coin flip that is the answer to job security. If you’re good enough to have your results look random it comes down to story-telling and dinner. Your value here might not be in delivering true alpha, but if you find a buyer you have created value — by definition you have given someone what they want.

[There’s a piercing conversation to be had here about commerce in general. If I sell snake oil or astrology is my income compensation for creating value? GDP and capitalism say yes. Is profiting from misinformation value-creation? How far does this go? The conversation gets quite “nudgy” if you focus too much on “what’s efficient” vs what tradeoffs are we willing to tolerate and for what ends. There’s a continuum.

Disagreement about object-level policy is downstream of differences in where people lie on the philosophical continuum. Nobody says “you should be allowed to pollute for a profit” but should you be allowed if that’s what people want? You’d want a polluter, the one with the upside to bear the risk, but I doubt even that anodyne statement is universally acknowledged. I could just as easily imagine an uber-industrial view that the people asking for the product should be forced to live with the pollution. Feel free to use pollution as a metaphor for FUD, artificially constrained university admission, or whatever profitable hobby horse irks you.]

If capital-compute-fueled efficiency makes it harder to create alpha or more generally “value”, it still won’t take away the types of value that are not provable. Maybe the only jobs remaining will be selling figurative placebos.

Now are they gonna pay enough to cover junior’s riding lessons?

Fck if I know. Ask a robot.

I know I’ll still be listening to Van Halen like the peasant I am. There’s probably something to that.

Money Angle

[Expanding on the asterisk from above]

*Financialization is an innovation because slicing up risks to sell to their highest bidder increases liquidity. An liquidity is a “good”. Liquidity reduces the cost of capital for industry. You will finance more businesses if you believe you can sell your shares. Insurance and mortgages are concrete products of the abstraction known as “liquidity”. All of this liquidity is an instance of abstractions that sit even higher in the stack — specialization, comparative advantage, and the surplus we enjoy from trading, I mean “trading” in the positive sum cooperative sense, with each other.

This harkens back to the liquidity premium discussion in Why Investing Feels Like Astrology:

Liquidity Premium

@Jesse_Livermore’s work refers to an idea he calls “transactional value”. It is the value that permits you to pay more than intrinsic value for an asset because you know you could sell it back into a liquid market.

Here’s Jesse parsing intrinsic value from transactional value:

The intrinsic value of equities would be the cash flow stream of the equities themselves, which you can collect and they belong to you and you can spend them and do whatever you want with them.

The transactional value would be the value that comes from the fact that there’s this “network of confidence” in the market, that people have been doing this for hundreds of years and we know that when you wake up tomorrow, the S&P is not going to be at 500. It’s going to be near where it was yesterday and people are kind of anchored to where its price is…You can basically take all your money, 100% of it, and put it into the stock market and know that you’ll be able to get a lot of that out anytime you need to. That’s the transactional value, which is the premium.

The idea that liquidity commands a premium is not new. If you have any money in a savings account today, you are paying a liquidity premium in the form of negative real interest rates. The treasury market discounts off-the-run securities because they are thinly traded even though they mature to the same value as their on-the-run counterparts. But I don’t want to dismiss Jesse’s notion of transactional value because it’s not novel. His expression of it is illuminating. For example, currency is made entirely of transactional value. The fact that we can rely on it to trade warrants a premium entirely out of proportion to the value of paper that represents it.

Money Angle For Masochists

Speaking of Mauboussin, he just published an outstanding paper:

Probabilities and Payoffs The Practicalities and Psychology of Expected Value (pdf)

This paper isn’t breaking new ground but it’s a fantastic reference that I’d require any trading trainee to read. When I was starting at SIG it was expected that everyone read the chapter about edge in Sklansky’s Getting The Best of It. Of course today with information being so abundant there are so many more sources for the same knowledge (taking nothing away from Sklansky…just how it goes. One day someone will refer to moontower as an og source on options stuff with an air of “it was great for its time” as their mind turns the brain-machine dial up to derivatives mode).

This new paper encompasses and extends in a comprehensive, approachable, practical fashion. The discussion of ergodicity and vol drag applies to multi-period expectation which is often lacking in arithmetic treatments of expected value.

🎙️Throw it on the pile, Erase your memory on Trade Buster’s Podcast (Spotify)

I joined David Sun to chat options.

I cover several topics that I find misunderstood or underappreciated.

• Trading the “blob”
• “The Pile”: daytrading vs position p/l
• Memoryless trade decisions; don’t even know p/l by trade
• Risk rules that don’t care about p/l
• Refinancing a long much cheaper
• “Tribal” position sizing
• Unit economics

If I had point to the most surprising parts it’s the gap between how vol books think about risk vs the wider investing world

David is in the moontower.ai discord but he has cultivated his own amazing community over the years. He even has a channel #nursery where parenting topics dominate the discussion.

He calls it the highest alpha channel in there 🍼

 

Stay Groovy

☮️

Moontower Weekly Recap

• substituting the easy question for the hard one (i realized i mis-titled the original in a way that would have cost me SAT points)
• how to know if your option trades are actually profitable

Friends,

I saw something Nick said on LinkedIn:

The reason why so many rich people don’t feel rich is because they know people even richer than themselves.

And they continue to meet these people as they become wealthier.

The end result is that no one feels rich, even when they are.

If you scan the replies you’ll find people nodding in unison to the beat of “comparison is the thief of joy” agreement.

The challenge is that we are comparative. Anxiety over status and pecking order are part of the human OS. In a Malthusian world, this inheritance adapted us to the cold struggle of survival. But in a post-fertilizer society, its influence is less important. Somebody should tell our limbic system that though. Instead, the same force that minimizes the biological requirement to compare — technology — is used to amplify it for clicks.

So here we are. Swimming in surplus, reading on hi-res screens, in a gilded hamster wheel, chasing a hamster on a bigger wheel.

Telling people to “not compare” is like preaching abstinence. Good luck with that.

Instead, we should redirect our urge to compare. Towards gratitude. When you have an annoying day or pang of jealousy compare it to a bad day. If your kid has the flu or you have some genuinely serious concern you do that god-bargaining thing — “Give me the flu, just make my kid better”, “Make me drive back and forth to the airport 50 times, just let me hear mom’s ok”. It’s like as soon as the stressor passes we forgot the deal we made in the foxhole. Don’t.

Right now, as you sit here with all the minor annoyances, be grateful you get to deal with them. You are here. You are some ghost’s counterfactual. Thank you for today. Say it. It’s very difficult to find bitterness when you sit in gratitude. And gratitude is so easy, you just have to remember to prompt it. It’s just a practice. And like any practice it’s a choice.

The laws are not fair. I don’t mean the laws of man but those of soil and rain, magnets and light. They are indifferent to constructed notions of justice. There’s a dumbass with an obelisk in his bank account. So what? There’s a kid with a heart of gold and a wizard mind on a feeding tube somewhere too. You could compare yourself to them but you don’t.

I was a compulsive comparer in my twenties. I’m sympathetic. But I had a major change in my 30s. Maybe some vulnerability crept in. A switch when I had kids perhaps. Health reminds you that choices have consequences. Or worse, you learn your genes are tyrants.

My wife can complain about a lot of things about me. But where she is effusive is in her belief that I have a super power where I am immune to comparison. I doubt I’ve broken any zen code. I’ve only chosen to be hyperconscious of randomness. Maybe that would make you a nihilist. Maybe you need some bigger sense of why or a story about how it all fits together. That’s ok. Sense-making is our uniquely human heritage.

For me, the perspective of randomness triages my exertion of control and mindshare. We can use something as mundane as diet to demonstrate. What I eat today is less random than the day the weather. I have some influence on what food is in the pantry. But even if I grew my own food I can’t control how the effects of industrialization influences the water and air that food grows in. You can’t literally eat like a caveman in 2025.

Similarly if I create value, I can influence my ability to pay the rent. If I add levers to that value I’d be able to pay more rent. But the function that sits between input and output is noisier the further you get from the initial push. But I’ll never take my opportunity to push in the first place for granted.

I mean it when I say any day I wake up is a great day. I don’t know how many I get. It’s all gravy. All of it. There’s nothing in the stars that says I’m entitled to any of it. Internalize that belief you’ll be left wondering — how did I ever compare myself to someone who “has more”?

Every f’ing day, the easiest thing on my to-do list is just not looking over my neighbor’s fence.

This is a nice read:

“Fuck You Money” is Useless Without the “Fuck You” (5 min read)
by Rick Foerster

I won’t address its content directly. It’s a short post and worth a click. But it resonated because it picks the scab of a theme I’ve been on for a few weeks, especially in last week’s it would be stupid if your game made you miserable.

I feel like Jim Carrey shouting ‘I think everybody should get rich and famous and do everything they ever dreamed of so they can see that it’s not the answer.’

I can see that and I’m a nobody. I could be a butler to a lot of people reading this letter.

The financially free are often the least free people I’ve ever seen. Which tells you that a sense of freedom comes from something else. To go one further, most people don’t understand what having freedom would mean…that the things you build your self-identity on en route to “getting to the freedom” become hindrances later. Like stockpiling treasure for an afterlife where the supply of treasure is already infinite. Now what are you about?

Kierkegaard’s “dizziness of freedom” can be avoided if you just stay on the treadmill and watch the mileage go up and to the right. But if you don’t love view from the treadmill, just remember…it’s a treadmill. Even as number goes up the view stays the same.

Money Angle

This is in some respect a continuation of above.

I’m a few weeks away from the 4 year anniversary of leaving full-time trading. I have a lot of thoughts about it. Much of it orbiting the theme of control vs randomness. Some of it having to do with crossing from early to late 40s.

Jared hits hard here:

This is the way I look at the world: the 20s are the 20s. The 30s are the 30s. But the 40s are not the 40s. There are the early 40s, and the late 40s. You cannot generalize about the 40s. In your early 40s, you’re full of vim and vigor, going to titty bars and strutting around like a peacock. In your late 40s, you get sleeping injuries.

In my own words — your early 40s are closer to your 30s and your late 40s are closer to your 50s. You either hear that and say “duh, water is wet” or our souls just melded. There’s no in-between.

I’m not up to writing about all of these thoughts I alluded to. But I’ll say this about leaving…it’s been hard but right. Look, it was never deterministic, everything’s a bet. But it was and is the right bet. I did believe it was right for me just after I did it. But that’s not surprising. The real test would be after time passed. Time has only reaffirmed the choice.

If you read Rick’s piece above and the most viral tweet I ever wrote which is a time capsule of my decision process around quitting you find the same message.

If you are going to be hammer, you should know why your building what you’re building. Sometimes it’s as simple as a roof over your family. But this section is in Money Angle because revenue minus costs is, beyond a certain stage of life, something you have more choice over. Your costs are not givens beyond a threshold that a lot of readers here will find themselves past. They are intentions. But did you give your life choices the DOGE treatment?

We praise inefficiency and bemoan waste and yet are our own houses in order? Is the logic of outsource every inconvenience bleeding over into outsource everything that doesn’t make me money? Is working for way more than you need a necessary security blanket or is it a balm for “I don’t have a point of view so I’ll just horde options”? Which is just finance-brain version of “I’d rather not think”.

Neil Postman worried that Huxley was right, not Orwell. That instead of oppression by Big Brother, we would embrace our technological overlords. We’d volunteer our souls.

By analogy, you can also contract Stockholm Syndrome from a logic of maximization. From an addiction to hit rate. To be clear, the poison of finance-brain stuff is in the dose not the principle. We find the antidote to the maximization urge in finance too. The post If You Make Money Every Day, You’re Not Maximizing is a treatise on hedging but if you read it up one level, it’s about decision making. There’s no long-term benefit without a cost — and often the cost is not direct but a possibility of loss. If you can’t afford to ever lose, how can you get anywhere worth being?

The variables…what to want, what to do, who to be around…they’re all choices. But the money stuff is empty if it’s divorced from intention.

If you don’t choose, your environment will happily pick for you.

A little post-script

A semi-tactical thought. It’s useful to think of various periods of explore vs exploit, putting aside negative connotation of “exploit. Maybe “explore vs focus” is worth the alliterative sacrifice.

The point is there is less paradox of introspection vs be a hammer than you think. You have an explore mode, you discover something worth focusing on according to your set of criteria, and then you hammer away until the cycle rejuvenates.

But that “set of criteria” is a deceptively small phrase considering what lies beneath. That’s where the introspection lives. That’s where you are most vulnerable to infection by the desire of others.

A little rant

If there’s an imbalance in the world or at least in America, it’s that we are full of hammers because endurance is how you become visible. But endurance, something admirable and necessary, can also become a liability for the rest of us.

I look at some of the people in charge (the net worths of senators have been making the rounds online) and I’m just like how about “do less”. Where is all this wealth coming from for people on salaries? So brazen and unrelenting and gripping to power. All of it, just hammers everywhere.

And then the private industry hammers who are anointed experts in all things.

Here’s a little exercise for you whatever industry you’re in — look at the most successful people — do they strike you as worldly paragons of wisdom? Do they have some special insight into the matters that have battered humanity since antiquity? If anything I feel the exact opposite. I just see relentless paperclip maximizers.

I’m unimpressed about everything about them beyond that narrow thing for which I’m simultaneously impressed beyond belief. You do not need to explain their achievements with a general capacity for wisdom. They have more in common with Escobar than Buddha. You’d have to kill them to make them give up.

If everyone starts thinking their boss or boss’s boss is Plato, then I’ll understand why these rich people are so worshipped. But the current scale invariance between our perception of powerful people in our lives and powerful people on TV does not compute.

You know who hangs on the life advice of super-rich people? Children. Because they haven’t been around enough to see all the contradictions. All the data that breaks the model. Today, we got grown folks playing the role of the little girl in that commercial. It’s cute for a kid. But if you believe what that girl believe as an adult…we put you in a rubber room.

Or give you generational wealth. Same difference.

Do it again, daddy.

Money Angle For Masochists

In value over replacement, I explained a handy feature of option theory or really derivative pricing broadly is it models important aspects of decision-making explicitly. Especially opportunity costs:

In options, the opportunity cost can be thought of as the risk-free rate. But the risk-free rate is an instance of a category we call benchmark.

Professional investors separate alpha from beta by benchmarking to an index. We can get fancier into benchmarking by using factors. Private investments can be subject to hurdles. All of these ideas are focused on the same question:

What is the marginal contribution of an action or intervention?

This is important because that’s what we compare the marginal cost to.

I discuss later in the post that structured products appear to have a compelling pitch by a sleight of hand. They prey on our “VOR blindness” when they announce that they can’t lose money. It’s a sales tactic that ignore opportunity cost. If I return 1% in a world with a 5% risk-free-rate or even 3% inflation I’m just falling for a real vs nominal illusion. My capital has lost ground despite the 1% gain.

[If you would buy these structured notes but be unwilling to spend your bond coupons on index calls you either don’t understand that you are doing the same thing in principle or you are saying I’d rather pay someone to do this. Either is ok to admit, just have your eyes open.]

In that example, making opportunity costs explicit neuters an otherwise compelling pitch. But this can also work in reverse. We can make an uncompelling pitch favorable.

I’ll give 2 examples from the trading world.

✔️Zero or negative edge trading strategies

You’re running a large delta-neutral vol book. It spits off tons of deltas as stocks move around and gamma varies. You need to continuously hedge. Assume your explicit and implicit (ie slippage) hedging costs are 10 bps.

Imagine you came up with a mean reversion stat arb strategy that had zero pre-transaction cost expectancy. Hell, pretend the strategy has -5 bps of expectancy.

Instead of facing the “street” on all these delta hedges you could internalize them by allocating them to the stat arb book. The book is nominally delta-neutral but might lose less in expectancy over some assumed holding period than constantly turning your deltas over on the exchanges.

In other words, a strategy that would be a non-starter from an alpha POV is worth doing because it loses less than the alternative. The bogey is not “we need to make positive edge” but the explicit cost of otherwise paying 10 bps.

By properly benchmarking our decisions, we have turned an uncompelling pitch to a favorable one.

[Real-life observation: Index Trader A is short QQQ gamma and Trader B is long AAPL gamma going into earnings and the stock has a big move down. Trader B needs to buy AAPL and Index Trader B needs to sell it. AAPL is 9% of QQQ so if the index book is 11x bigger than the single stock book and they have matched greeks, then the buy and sell orders would happen to pair off. But even if they didn’t the deltas between the 2 books would be virtually paired off and the firm would hedge the residual in the open market. This saves transaction costs and slippage on gross position sizes.]

✔️Option “dissection”

In the clip below (excerpted from the large screencast), I explain how market makers use synthetic and arbitrage structures like condors and butterflies to “chunk” risk by themes. They can then remove such well-defined strategies from their main risk view so they don’t have to hedge the greeks they spit off.

It’s not alchemy as far as edge. It’s simply splitting your risk into those that can be safely cordoned off vs ones that need more management (open ended exposures to vol or higher moments of the distribution).

In a large options book you have all this open interest because you got paid to buy or sell it at one point. But now it’s just stale inventory. You have no view on it. It’s effectively random risk. But it’s expensive to flatten it all.

[Actually it’s incoherent to do so. The whole reason you have a business is because someone needs to warehouse the risk that arises due to a mismatch in timing and desire — hedge fund A wants to buy puts on Tuesday and mutual fund B wants to sell calls on Thursday. Your role is to trade with both of them and manage the vertical spread they’ve effectively foisted on you. Sequentially to boot. You were forced to be short vol for 2 days in the interim.]

Your risk management logic looks like:

a) I need to hedge

b) Hedging is expensive

c) Can I reduce hedging costs proportionally more than the risk of being less hedged adds?

In other words, your risk management criterion is against an inevitable cost. The hedge is not positive expectancy, it just needs to reduce risk at reasonable cost or reduce costs without adding risk.

Dissection reduces costs without adding risk (although it changes the shape of risk. If you are indifferent to the new shape it gives you choices and those choices need not have anything to do with being profitable — they just need to lose less.)

From My Actual Life

This holiday weekend, I’m on a boys trip with my sons. We are spending 2 days touring historic Gold Rush sites in Northern California. At almost $3k an ounce, we’ll be panning with mesh to make sure we don’t miss any flakes!

Stay Groovy

☮️

Moontower Weekly Recap

• Eagle-eyed chart reader
• Go forth and tinker

Friends,

Every now and then I do some self-indulgent journaling in here and your eyes own the risk of seeing it. If you want to skip ahead to usefulness scroll down to Money Angle.

Ok, just some thoughts.

As sports goes, our household Superbowl was yesterday.

I’m so so proud of this shifty guard who thankfully got mom’s athleticism.

We won the championship and had an undefeated season. It was a major highlight of the last few months to help coach an enthusiastic group of 6th graders.

As it comes to my son, it’s a joy to watch him get better. He has such a great attitude and that’s what makes me the most proud. As a sports career goes I have no idea how still-not-here puberty is going to change his body and mentals. He’s currently undersized (a lot of former Stanford and Cal athletes amongst the other parents in the area) and one of the youngest kids in his grade. He’s quick, outstanding handle, can get to the hoop in traffic and can be relied on to get a strip or jump a pass for every 2 minutes he’s on the court. The press was our team strength and he was a big part of that. But we have a lot of work to do on improving shooting range. In contrast, the top scorer on our squad regularly spots up from 4 ft behind the 3-point line where defenders don’t chase and drains it (averages 3 treys per I’d guess 20 minutes of gametime).

[The coach we beat last week wouldn’t even shake my hand because he thought it was unfair — “#5 is knockin’ down down step-back 3s like that”. But to be clear, that boy whose an all-around outstanding player, didn’t make our parish’s all-star team so it got me pretty po’d that the coach thought we were stacking our team. I mean that kid isn’t exactly happy he didn’t make the top team either so sour grapes all around bruh.

Part of the drama is there are some examples of parishes who disband their all-star teams to stack their regular teams but we aren’t one of them. Youth sports can be quite silly and this isn’t even AAU.]

Back to puberty.

We have no idea what will happen when hormones kick in. Will it fuel the competitive spirit that makes a kid shoot jumpers for 90 minutes a day to shine on gameday or impress their crush? Will it lead to retreating to other forms of status-jockeying that aren’t athletic? Be a troublemaker, play some power chords on stage, become an influencer, take 54 AP courses — who knows.

On the physical side, two of the kids we played against yesterday were 5’11. Zak is 4’11. And even though I’m 6’1 I entered HS at 5’7 (and grew an inch in college). Plus I’m also a bit of an outlier in my family who is generally short. I have a great uncle who was a jockey. My aunt is also 4’11. My wife is Vietnamese, she ain’t pitchin’ in the inches. Berkson’s Paradox requires Zak be more skilled than most of the top players just to see the court as we get closer to the hyper-competitive HS years. (He’s speedy so we are gonna try track as there’s a better chance to make a HS team there than on the hardwood. None of this is about college by the way, just that if you enjoy playing sports you should try to play in HS so this is angling for a pathway.)

Anyway, none of this is here or there but just some of the thoughts in the back of my mind as I watch my kid get older. It’s not a source of anxiety because I’m not the type to try to engineer outcomes for better or worse. I guess if there’s any anxiety it’s because I wonder if I’m supposed to try. Like am I not being responsive enough to a world that feels like it’s becoming unhealthier in some self-defeating or anti-social form of competition.

I increasingly have that feeling you get in Monopoly when you watch 2 people trade. You might not know who got the best of it, but everyone who didn’t trade is worse off. Chris Arnade is a former trader, who has been chronicling his life as he literally walks all around the world.

Don’t let the title fool you into thinking it’s a superficial, I-vacationed-in-Paris-and-it’s- better-than-America. In fact, Chris is quite critical of European politics if you follow him on Twitter, which lends his insights here even more credibility. He literally walks the walk — I don’t take his observations lightly.

You should just read it. He sees better than I do anyway.

My feeling is that many victories that follow from copying your heroes will be quite pyrrhic. I’d like to say choose those heroes wisely but my anxiety probably comes from recognizing it’s an incoherent bit of advice. The truth is you’ll follow whatever flatters your sense of how the world “should” work and when you arrive you might need a decade-long shower to wash off the regret but more likely you’ll organize your entire sense of self around having won at a game that you thought you entered of your own will.

It’s a dark irony that a member of the 27 club owns the quote, but “no one gets out alive”. Whatever you tell yourself about your game, I hope it makes you happy. It would be a shame if it made you miserable. Come to think of it, shame isn’t the right word. Stupid is.

It would be stupid if your game made you miserable.

Do the people who you think are winning, the people you want to model, seem like happy people?

[A little meta-note about this journaling exercise. It was partially inspired by what I see in the public domain but more driven by what I’m seeing privately albeit often a few steps removed. Every day I become less impressed with people who seem to be the envy of others. If you are a young striver, please, cut yourself some slack. Your heroes are every bit as clueless as you are. In fact, that’s what makes them such useful, notable hammers. Please enjoy the journey. That’s the closest thing I can muster as advice goes. Nobody gets out alive.]

Money Angle

Beware Tantalizing Targets of Private Equity/Private Credit Returns (16 min read)
Michael Kao

The piece is both educational—breaking down how these financial mechanics influence IRR (I really liked how Michael approached the metric) and superbly practical. It presents a wise due diligence framework and real-world case studies on assessing private investments. A must-read if you invest in private deals.

Money Angle For Masochists

A few days ago I got the idea to do a screencast where I use an option chain and greeks explain a bunch of vol trading concepts.

None of my front-ends really look like what I had in mind so I spent Wednesday building a minimal viable version to allow viewers to look over-my-shoulder as I explain some stuff.

On Friday, I just turned the camera and started blabbing. No prep. I had an open afternoon so no time constraint. I just let it rip. On a Twitter livestream.

I hear it was helpful. I decided to call it Years worth of option education in under 90 minutes. That was the most click-baity title I could give it and still live with myself.

I re-watched it to chronicle what you actually can learn. Turns out it’s a lot of stuff that’s pretty hard to come across if you haven’t spent time on a prop desk.

Give it a gander. Love to know what else can help.

Modeling a vol curve

• Computing a forward
• Specifying a vol curve with standard deviation gridpoints
• Computing the gridpoints
• Inputting skew parameters at the points to fit the market
• Using Excel’s linest function to get the coefficients of an n-order polynomial
• Using the curve to estimate IV for any strike

Option valuation

• Implementing Black Scholes for European-exercise style options
• Includes greeks and N(d1) and N(d2)
• Numerical methods for estimating gamma and theta

Interpreting skew

• How large skew values lead to counterintuitive probabilities as the implied distribution balances probability with magnitude
• Using vertical spreads to see the implied distribution
• Changing skew parameters to watch the spread prices change and the distribution shift
• How skew “corrects” the Black Scholes distribution to match empirical distributions
• Comparing implied distributions to “flat sheet” distributions

Understanding vol changes day over day

• The difference between fixed strike and “floating” strike vol changes
• How fixed strike vols change arise from the interaction of spot moves and skew parameters change
• Why fixed strike vol changes drive your p/l

Dissection

• How market makers actually use classic option structures and synthetic relationships
• Option traders “chunk” their positions to understand them just as seasoned chess players don’t see random configurations of pieces but see “mini-themes” that they understand deeply. For option traders these themes are structures like butterflies and condors
• How market makers “take structures out of the position” to minimize hedging costs

Decomposing vol p/l from greeks

• Learn how to use your gamma and theta to estimate the realized vol portion of your p/l
• Learn how to use your vega to estimate the implied vol portion of your p/l
• See how delta p/l comes form options and share positions
• Understand how the tug-of-war between gamma and theta relates to the stock’s move on the day

Uncategorized

• Pulling market data into Excel
• why the late 90s tech bubble was not irrational and how option markets understood that
• bubble distributions from the lens of the option market
• Put-call parity
• An intuitive way to estimate gamma p/l from middle school physics math: delta = velocity, gamma = acceleration, price change = time passage, and distance = p/l
• This shows why p/l is a function of the stock move squared

From My Actual Life

As a lifelong NY Giants fan today is a Saw-level conundrum. I cannot stand either team. The Chiefs because I have a pulse and the Eagles because I grew up watching Randall Cunningham, Brian Mitchell, and DeSean Jackson break my heart.

The Chiefs have Spags who was the Giants d.c. when they won in 2011.

The Eagles got Saquon.

Saquon is one of those players you watch sports for and frankly the Giants did him dirty. He gets the edge. Go Eag— ughh I can’t even type it.

Go Saquon!

Stay Groovy

☮️

Moontower Weekly Recap

• value over replacement
• Seasonal Volatility

Friends,

I was poking around on Matt Zeigler’s website Cultish Creative and this post grabbed my attention:

Process Saves Us From The Poverty Of Our Intentions (1 min read)

A few excerpts:

The quote comes from sculptor Elizabeth King. It’s the idea that process and the act of doing are how progress is made. The poverty of our intentions, or the obsession over only accepting narrowly defined outcomes, is the toughest obstacle we face. Fortunately and unfortunately, it’s self-imposed…When we make the decision to just act, when we do so with vulnerability and take the risk, we embrace process. If we only accept perfection, if we think we need more confidence or we convince ourselves we don’t belong, we‘re stuck in the poverty of our intentions.

The quote inspired Seth Godin’s The Practice: Shipping Creative Work. Godin paraphrasing: “Doing what you love is for amateurs. Loving what you do is for professionals.” Eventually, we have to stop brainstorming, stop negotiating with ourselves, and start working.

I’m sharing it because it echoes a message from Jack White who I’ve found to be inspiring ever since I discovered the White Stripes 20 years ago. Jack pushes back against the cartoon of an artist waiting for inspiration. He treats making music like a job.

The attitude is captured in another quote, this one by writer W. Somerset Maugham:

“I write only when inspiration strikes. Fortunately it strikes every morning at nine o’clock sharp.”

I went looking for that quote because I’ve heard it before but I didn’t know who Maugham is. I went to the heading of his Wikipedia entry called “Reputation”. He died in 1965 at age 91. He was an active writer for about 65 years. Six. Five. And still he gets dealt this:

The critic Philip Holden wrote in 2006 that Maugham occupies a paradoxical position in twentieth-century British literature. Although he was an important influence on many well-known writers, “Maugham’s critical stock has remained low”. Maugham outsold, and outlived, contemporaries such as James Joyce, Virginia Woolf and D. H. Lawrence, but, in Holden’s view, “he could not match them in terms of stylistic innovation or thematic complexity”.

And he doesn’t seem inclined to object.

Maugham himself, although he never used the terms “second rate” or “mediocre” about his work, was modest about his status. He said that lacking any great powers of imagination he wrote about what he saw, and that although he could see more than most people could, “the greatest writers can see through a brick wall – my vision is not so penetrating”.

I just find all of this comforting. I think the greatest battle we face when it comes to what we do is just doing it. It’s like the timeboxing thing. Don’t judge the day’s effectiveness by the outcome but by whether or not you actually focused on the task you said you were going to focus on for 4 hours or whatever.

It’s possible that someone is just consistently wrong on what they choose to work on but I doubt being Costanza makes up the bulk of disappointing outcomes. I’d bet it’s just not doing what you said you were going to do.

I don’t know. The world feels complicated but I think truth disguises itself as simple and boring.

Maybe it’s a Detroit thing. Here’s 60 seconds of Akon stunned by how Eminem works.

I guess if you write for 65 years, you’d blind pig yourself into a few banger quotes. 2 more from Maugham that slap:

We are not the same persons this year as last; nor are those we love. It is a happy chance if we, changing, continue to love a changed person.

My wife and I never take it for granted that we have grown together. You are naive about those odds when you get married and whether that naivety was useful or not is only known retroactively. Getting older teaches that there is no front in life in which entropy rests.

And one last one from Maugham tells me he was inured to his reputation:

“I began to meditate upon the writer’s life. It is full of tribulation. First, he must endure poverty and the world’s indifference.”

 

At least he did not endure the poverty of intention.

Money Angle

The account @BowTiedFox quote-tweeted the above the post with its own thoughts. This fox account’s bio says “software engineer interested in automating sales and tech jobs with AI agents” so add salt to taste but I’m sharing the fox’s thoughts because my antenna have been vibrating at similar frequency lately.

It’s a long excerpt for a tweet but I’ll share it unedited and meet you on the backside with a couple of my own thoughts.

This is what the fox said:

you know, I’ve been thinking about how there’s a shrinking window of time to jump social classes and why I’m leaving my j*b in a few months

I’m going to explain why by showing you the bullshit I have to deal with at w*rk

corporate software engineering has never been as cucked as it is today. and it’s only getting worse

large-scale software is a completely different game than building your own projects

at w*rk, I sit through useless meetings for at least 2 hours a day:

• managers actively waste your time so they can seem productive
• bureaucratic red tape makes it so that small changes take weeks
• everything requires tons of reviews and approvals
• anything done different from the norm is too risky
• anyone you upset is risky so everyone is treated like a child
• any disagreement is risky so always say yes

np I don’t have to waste much brain energy right? just smile-nod-agree to everything

plus, every time I have a problem, I can just throw it to a team that deals with that problem:

• pipeline issue? not my problem, gl devops
• database slow? database admins are on it
• auth? we have an internal security team
• incident monitoring? on-call SREs
• customer support? filipino VAs
• testing? let QA deal with it
• network? IT and cloud guys

imo this is fine if you want to do nothing. some people might even call me retarded for giving up easy money. “bro I’d love to coast, send me your lead’s @”

but it’s soul-sucking to do shit work, and it makes you half-ass everything else in your life. every action creates a habit which affects your identity

I only have one life, and I don’t want to waste it when I can create something magnificent and beautiful, while pursuing freedom and excellence

even if you don’t buy that, staying at a bullshit j*b is becoming higher risk because AI will just replace you

but there’s no way your boss is going to tell you that your position is a ticking time bomb. yeah it’s nice for a little while, but it’s eventually going to be “move up or move out.” evolve or die

and I’m not even factoring in the opportunity cost of not building your own projects:

1. you’ll learn nothing if every problem is handed to a different team
2. you can build stuff at lightning speed because no corporate monkey rituals, can use any AI tools, and because you’ll know your own codebase way more than one that’s handed to you
3. if you’re context switching too often, you won’t be able to focus. and every extra hour on yourself is worth more than the next because you’re continuously improving the product and your knowledge

imo I think these next few years will be the last chance to make an enormous amount of money before social mobility becomes extremely difficult

think about it: wealth comes from being lucky or being early

jeff bezos is a good example of this. left a comfy senior VP position at a hedge fund to yolo all-in on amazon during the beginning of the internet era

you have one last chance now to take the same gamble as him. the future belongs to those who are willing to take a bet on the future

we will probably get to a point where AI starts closing all market inefficiencies and innovates much faster than you can

the only way to make money in the future will probably be with an eccentric invention, something culturally revolutionary, or becoming an entertainment star

we’re in a weird period where anyone from anywhere can make money because of the internet. if you look at any other point in history, you can see that most big money was made from:

• industrial monopolies
• stock market manipulation
• resource exploitation
• war profiteering
• political corruption
• land grabs
• media control

and this is why a lot of people hate money and think it’s “dirty.” only recently has the internet made it so that you can actually make a lot of money legitimately because of network effects and open information

but this won’t last long. I can’t emphasize enough that competition is increasing across everything everywhere

people are becoming more comfortable using AI to replace humans on a mass scale. plus they’re using it to learn any skill with AI tutoring. it’s harder to stand out when everyone levels up, AND when there’s way more AI-generated slop to sift through

I mean have you seen how much more competitive high-paying careers have become? like med school, law school, investment banking, management consulting

or even university admissions. getting into harvard used to be simpler for boomers. “I like apples, apples fall from trees, gravity makes apples fall, I want to learn more in your physics program” -> congrats accepted under our 36% acceptance rate (now 3.6%)

now you need to go work in a foreign country building houses, “publish” (ghostwrite) an NYT bestseller, author a research paper, have internships, play two instruments, speak three languages, be a multi-sport athlete, have exceptional grades in every subject, perfect exam scores, impeccable interview skills, and partake in whatever other nonsense song-and-dance

I remember even getting a software job in the 2000s was more like “I like computers, can I work here?”

we’re reverting back to the income inequality in older civilizations like in europe and asia:

• most wealth concentrated within old elite families
• intense segregation between rich/poor
• one mistake and you’re cooked for life. “C students hire A students” meme doesn’t exist without the internet
• decreasing standard of living like small bug apartments with multiple people
• regulations are always added, never removed

and if you think the competition isn’t that bad, you probably haven’t reached the upper tiers. it’s easy to become complacent when everyone around you is a monkey

but the margin for error at the top is razor-thin. elite performers do every single thing nearly perfectly

that athlete you’re trying to compete against? he’s eaten the same hyper-calculated meals for the last two decades, engineered for peak performance, with AI analysis of his genetics and the latest studies

and if you’re struggling with the basics? rip in peace!

my point is that elite competition is brutal, so every minute right now is more important than you think it is

minimize the time you waste on stupid bullshit and unhelpful people–the smallest improvements are going to make the biggest difference

think of it this way: you know Usain Bolt is the fastest man in the world…

who’s number two?

The last few weeks here I’ve been thinking aloud about the econo-political-cultural environment with a slant of how to focus on what you can control. This groping is deeply connected to a sense that no matter what the VIX says “vol is high”. The tree of forking cultural paths before us culturally is wide.

I’ve been musing aloud because this topic is like the tag in my shirt stabbing my neck. Low-grade bothered. The fox might be closer to correct than not and that feels like a major change in the playbook that has been a reliable path to a better life. A playbook immigrants passed on to their kids who are now having kids but might find themselves fighting the last war. The doctor/lawyer/software/banker prestige path looks increasingly vulnerable.

Saying “this time is different” whenever an all-purpose technology that raises productivity across the board flirts with your sense that it will reshuffle the deck has a poor track record. Conventional intelligence, the kind school grades you on, has been rewarded at every step of innovation since I’ve been alive. The world has belonged to nerd kids who loved their Apple IIc.

I suspect we are in a goldilocks moment right now where if you use all the new tools you feel powerful. LLMs have raised the put strike on your weakest link. But in the coming years, the red queen treadmill will be at max speed — being massively productive will be the standard. You will be expected to be able to do all the things.

When I read between the lines of Satya’s words I hear a “you will learn or else” even though the formal message sounds more empowering. The hustlers will accelerate, the disengaged employee or person with an email job that knowingly nods to the term “bullshit” job is toast.

[From an economic POV, if these visions turn out to be directionally right then I wonder what happens to all these $2mm 3-bedroom houses from the 1950s in CA underwritten by mid-6-figure W2 jobs. The same ethos that uses “productivity”, “GDP per capita” and “efficiency” arguments to bludgeon more generous PTO and leave policies also thinks you are the biggest cost to its goals. Losing sight of why we choose capitalism to serve the abstract “story” of capitalism is a dystopian maneuver that we seem uniquely prone to.

In a real economic sense, we are both costs and clients but the rules we write are a choice about which role we emphasize.]

I used the word “hustlers” for a lack of better word. It’s a bit low-res but I want to clarify what it’s not: it’s not kids who are just smart and good at following instructions.

When I asked followers to push back on the Fox’s tweet, this one did a great job of explaining why I think the value of smart is reaching a secular peak:

The red queen means they will still need to be able to do that but also have a point of view. Conviction and relentless wrapped around something more than “keeping your options open”. I want to say creativity but the word is a bit too artist-loaded. I think it’s really about risk. They will need a real relationship with risk. The ability to take it (that’s what commitment is…making yourself vulnerable) and the capacity to reason about it. And this only comes from practice.

If that sounds obvious, then how do we reconcile it with the obsession to reduce [perceived risk] via grade-maxxing and college admissions? The reconciliation is we ourselves are fearful. Nobody wants to experiment on their kid even if they see the tides turning.

And it doesn’t go away. When I left my job, my mother turned into the same person who stood over me when I did my math homework. She wants the best for me, of course, but she also doesn’t want to worry about me. If I am financially secure, the impact on both her own material and emotional left tails are shortened. Understandable but I can’t accept her context as my own. It’s a consideration I must discount appropriately.

Look, I expect my kids to get good grades. I want them to have choices. But the number one thing I want is for them to be well-matched to what they do. I’m not sure how much influence I have on that but I do believe you can’t underestimate someone who loves, cares, is good at, and tireless at what they set their sights on.

It’s a cliche, but a good one — you want to get more comfortable being uncomfortable. Chris Cole has this idea that you can’t suppress volatility. It just changes form. You can try to backstop the price of assets but if it creates moral hazard you create inequalities. The volatility comes in the shape of guillotines not sigma. If risk-aversion creates dull boys and girls are we just trading an anti-fragile sense of self for an Audi and private school.

In closing, if you scroll down that first Twitter thread you’ll see a recent clip of Bezos urging us to compensate against our default impulse to overestimate risk and underestimate opportunity. He adds, “Thinking small is a self-fulfilling prophecy”. Many will say “survivorship bias” but they are overly focused on the obvious fact that he way outperformed his own advice. But it doesn’t make him wrong. Instead, I focus on what he repeatedly said and written over many years. To me he is not defined by his billions but by the fact that he had a point of view, bet on it, hammered it, and would have lived with the consequences.*

Is a point of view and the spirit to follow it going to guarantee anything? Of course, not. But I’m starting to think that the absence of a point of view will leave you stranded.

*And what of the consequences? If he was wrong, he wouldn’t be Jeff Bezos. But he still could have gotten that Audi by cashing checks from David Shaw. Maybe what I’m feeling right now is that the vol is so high that the paths that weren’t risky are now risky and it’s not yet common knowledge. If the spread between risky and not risky is narrower, then on the margin you are a better buyer of the risky path. The historically sure path is overbid if the gap between the tallest and shortest serf narrows.

Money Angle For Masochists

I wrote this tweet a while back that bears repeating because I’m not sure if there’s any topic that seems to come up more when I’m asked about risk management.

Risk management continuum very bluntly stated:

1. Rules for cutting risk when you lose (P/L memory)

2. Rules for how big you can be constrained by aggressive portfolio shock assumptions (ie no P/L memory but positions that can lose X% AUM not allowed)

I’ll just say from option trading context #2 is preferable because the best opportunities likely occur when everyone else is constrained by #1

But that framework is not typical, harder to implement and will often make you feel like you are leaving $ on the table

But you don’t lose your business on an idio risk. There’s an irreducible amount of systematic risk already. Don’t make idio something that can take you out.

From My Actual Life

I played CYO basketball growing up. It’s organized through Catholic dioceses across the country but you don’t need to belong to a parish. Everyone’s welcome. My boys have been doing it since they were eligible in 2nd grade.

[I started (assisted) coaching this year for my 6th grader Zak. Our first playoff game is later today. Obviously we’d like to win. His soccer team lost in the first round of the playoff after an undefeated season and this basketball team went 10-0 but we’re playing a tough squad we haven’t played before. Zak might feel cursed if he gets bumped in the first round again.

In any case I haven’t coached the kids in a few years and it was nice to be getting that time with them so promised I’d coach both of them during their middle school years of CYO.]

Since the league is through a diocese we say a prayer at midcourt before the game. We had a game yesterday so I picked the one my favorite HS teacher said before every class. (He passed away last year).

Grant me the serenity to accept the things I cannot change.

The courage to change the things I can.

And the wisdom to know the difference.

It’s a famous prayer but the only one that resonated with me growing up. My history teacher used that one which always made me think of him different. Like he didn’t just pick an Our Father or Hail Mary like the others on autopilot.

He was a quirky guy. Wry sense of humor. He had certain catchphrases…like in understanding motivation he always liked to follow the money. “Greedy nasty little oafs”.

He was a bit of a conspiracy theorist which felt less common in the early 90s. Even the term getting pilled Matrix-style hadn’t originated yet. He was pilled. And that’s gonna work on HS students whose only source of knowledge was textbooks and 24 volume Encyclopedia hawked door-to-door (ours was Colliers not Britannica. Like McDowells is to McDonalds). He claimed Paul Revere was in jail the night of the midnight ride so couldn’t have made it. He believed the US knew the Japanese would bomb Pearl Harbor. He was pretty ruthless as an instructor. But it was my favorite HS class and I was saddened to learn of his passing. I haven’t been required to say a prayer since HS. So I picked the Serenity one and said it was in an honor of a teacher that I’ll always remember.

[Random personal bit: Tony Reali is a good friend. We were super tight in HS although only get to see each once a year or so now. He and I did a school project in that class where we roleplayed Sportscenter but with history topics instead of sports. Tony always wanted to be a sportscaster if he wasn’t gonna be a Yankee. Well, if you know who he is you know dreams come true.

Tony’s the same mench he was when we met over 30 years ago when we’d jam out to Aerosmith’s greatest hits on the way to our own CYO games for St. Leo’s.

My mom still gets a charge from seeing him on TV. “He loved my cooking”.

Mr. Matson was both our favorite teacher. RIP.]

 

Stay Groovy

☮️

Moontower Weekly Recap

• arbitrage is a hall of mirrors
• Moontower “Blaster” Tool

Friends,

When this letter started 6 years ago, it was mostly curation — I just shared things I found interesting. Although I write and editorialize much more than I did at the start, the curation will always be a major part of these communications.

In that spirit, Wednesday’s post breakeven, was a pointer to what will prove itself to be a top-tier substack for practical investing knowledge, especially for options.

Today I’m pointing you to another strong recommendation. First, I confess that I subscribe to over 100 letters. I read a small fraction of what I subscribe to. I take a look at the topic and quickly triage whether I care to ever get to it or not. I’m perfectly happy to be on someone’s mailing list even if 1 out of 5 of their posts grabs my attention. That Lord Acton quote “Judge talent at its best (and character by its worst)” holds up well. Every act of creation, whether it’s insight or art, has the potential to stay with you forever. One banger can make up for lots of duds. Slugging ratio is more important than batting average when it comes to substance.

[It’s often the case that something I consider a dud isn’t even a dud, I just wasn’t “ready” for it. If I’m not in the right mindset no high-minded thought piece is gonna matter. I’m too busy being a woodpecker to indulge material that doesn’t fit in my beak’s path.]

That said, there are a few substacks that I almost always read even if the subject isn’t immediately compelling. The writing itself is enough of a reward.

The writer I discovered in 2024 in that category is experimental psychologist Adam Mastroianni. I’ll let his about page speak for itself. I recommended him once before:

“These posts address how our minds work and critically, how they don’t.

• How to get 7th graders to smoke
• Excuse me but why are you eating so many frogs

The last two are a series about the disaster known as peer review and Adam’s thoughts on how to reform it or create a parallel path.

These posts are all well-argued but also snortingly hilarious.

• The rise and fall of peer review
• The dance of the naked emperors”

I’ll add 2 more today.

1. The Anarchist and the Hockey Stick
2. Two stupid facts that rule the world — this one is especially important to me because I’ve thought about writing the same message. As I like to remind people, the presence of 8 billion humans in this world is one of the facts that we don’t seem to internalize the ramifications of. This post says what I want to say only with way more skill and humor. The essay is an immediate entrant in Moontower’s Favorite Posts By Others.

Money Angle

In last week’s Money Angle I touched ever so briefly on the $TRUMP meme coin. The thinking behind that section continued to stew in my head after I published it. This quote tweet slipped out:

That’s about a 95th percentile virality for my tweets (my social media skills are a slow burn not a neutron star).

I want to talk about this a bit more.

The optics of POTUS shilling openly for personal financial gain is jarring because it conflicts with long-standing norms associated with that office. It’s not that anyone thinks presidents are above corruption, but this is brazen in a way that either offends or emboldens. His defenders may say that politicians are always corrupt and on the margin it’s more virtuous to be open about it. I have my own opinions but the upshot of what I’m about to tell you is that you shouldn’t care what my opinion is anyway. One’s opinion of such things is moot from the forthcoming perspective.

Before we get there, I’ll let others articulate the criticism of what appears to be happening. Here’s Scott Galloway in his recent piece America For Sale (a short, amusing albeit dark ride):

I respect the Trump grift more than the plain vanilla trading on material nonpublic information. It’s more creative, and if you’re going to abuse the public trust, you should do it for billions vs. millions.

The most disappointing thing about our elected officials is not that they’re whores, but what cheap whores they are. For his $250m investment in Trump, the wealthiest man in the world was able to increase his purse by $140b (56,000% ROI). The increase in wealth had nothing to do with the performance of his businesses, but the market’s belief that we are now in a kleptocracy and the distinction between winners and losers is no longer about innovation but proximity to power. The polar vortex of corruption is here, as greater incentives, fewer guardrails, and the sense that character is no longer valued in America have cast a chill across capitalism.

Money has not washed over just our government, but also what has traditionally been a powerful check on corruption, the media. ABC’s Bob Iger sold out and settled rather than fight a lawsuit Trump brought over George Stephanopoulos’s on-air remark that Trump had been “found liable for rape,” a suit that looked very winnable for ABC. Jesus, Bob, really? FYI, the judge in the case also used the R word.

Many are now afraid of confronting Trump and First Lady Elonia, not because they think they might wrong them, but because they are worried about the aggravation and expense of being sued. In the end, the media and the citizenry are making a money choice when what is called for is a moral choice. (See above: Bob Iger.) For people who are not economically secure, it’s upsetting but understandable. For Bob Iger, it’s shareholder value colliding with cowardice. Last year the Disney CEO made $41m. But I’d argue he is increasingly impoverished.

Hold that in your RAM. Here’s a blurb from Byrne Hobart’s “what I’m reading” missive that came out yesterday (emphasis mine):

Ross Douthat has a lengthy interview with Marc Andreessen on how Andreessen and a large number of his peers suddenly switched to supporting Trump. Looking at the evolution of Big Tech’s politics over the last five years certainly induces some whiplash, and makes me long for simple Occam’s Razor-style explanations like “Vladimir Putin finally managed to steal George Sorors’ mind control ray.” But one thing Andreessen says provides some helpful perspective: tech was never uniformly left, and had a small active cohort and a majority of people who went along with what the majority view seemed to be. Now, the winning small cohort is on the right, and the go-along view is now support for Trump. But that explains the big swings. (Another explanation for how vocal they are is that Trump is clearly a man who enjoys effusive compliments. When dealing with someone that braggadocious, it’s not enough to say that he’s good, which is why many people are saying he’s the best President they’ve ever seen.) The interview closes by noting that as soon as the Trump coalition won, the infighting started; politics is not something that happens only on a Tuesday in November.

 

Fi-douche-iary

Ok, let’s start from the abstract. Capitalism.

Trump’s brand of capitalism looks a lot like a Trojan Horse made out deregulated bronze but inside harbors its antithesis. Galloway:

On his first day back in office, Trump signed an executive order delaying the ban for 75 days, saying he wanted to engineer a deal that would give the U.S. half-ownership of the app. “If I don’t do the deal it’s worth nothing,” he said. “If I do the deal it’s worth a trillion dollars.”

This is not a new concept — there’s even a word for it: socialism. Socialism is when the state controls the means of production. America has proven, in spades, that the full body contact of competition creates more economic growth than the government cosplaying a business. Whether it’s the U.K. investing in DeLorean or Obama propping up Solyndra, it usually doesn’t end well.

The leaders of the most important companies in the world are falling in line because the operating system of capitalism’s vulnerability to ransomware is becoming common knowledge in a way that does away with any pretense.

More subtly but just as important is a sense that any action that can be traced back to “creating shareholder value”* will not only get a pass, but be practically mandated. The incentive is umm, I hate to use the word because of its other context, but it’s perfect here: unburdened. There is no quandary about what it means to be a fiduciary. There is only one relevant test now — are you a paperclip maximizer?

[*As of this publication in 2025, “shareholder value” is a postmodern concept. It appears the fastest way to increase your share price is to swap the corporate coffers for BTC.]

Consider Zuck.

Is his recent glow-up genuine or part of his groveling tour to get in the POTUS’s good graces? Zuck is like if Young Sheldon read that Dale Carnegie book then started slavishly going down the checklist to get what he wants. Recall the warning NFL team owner Cameron Diaz gets in Any Given Sunday: “First you get along, then you go along”.

I try to take a charitable line on individuals because our incentives and environments dominate us (even a casual reading of history reveals how thin the line between civil and savage is. If your kids are threatened, you will turn into a werewolf in broad daylight without an ounce of remorse.)

Business leaders are to shut up and dribble because once you win the war of defining capitalism strictly as paperclip maximization then any deviation from that to widen societal values is prisoner’s dilemma suicide. I quote Scott Alexander’s magnificent description of such multi-polar traps in Don’t Look Up It’s Moloch:

All these scenarios [described earlier] are in fact a race to the bottom. Once one agent learns how to become more competitive by sacrificing a common value, all its competitors must also sacrifice that value or be outcompeted and replaced by the less scrupulous. Therefore, the system is likely to end up with everyone once again equally competitive, but the sacrificed value is gone forever. From a god’s-eye-view, the competitors know they will all be worse off if they defect, but from within the system, given insufficient coordination it’s impossible to avoid…in some competition optimizing for X, the opportunity arises to throw some other value under the bus for improved X. Those who take it prosper. Those who don’t take it die out. Eventually, everyone’s relative status is about the same as before, but everyone’s absolute status is worse than before. The process continues until all other values that can be traded off have been – in other words, until human ingenuity cannot possibly figure out a way to make things any worse.

Matt Levine has this ongoing trope of “everything is securities fraud” in reference to the idea that from a market-maxi perspective, anything that hurts your stock price can be adjudicated as a crime. That logic is a profound end-around where the judicial branch subsumes the legislative.

For capitalism to serve us broadly there needs to be some airgap from a corrupt OS lest the worst people will not see “fiduciary” as something to live up to but as a shield for their psychotic impulses.

“Hey, if I don’t [insert objective that sacrifices common good], I miss earnings, my cost of capital increases, and I must fire people.”

Look, if the road to hell is paved with good intentions, then consequentialist thinking is an over-optimized bulldozer. Our frontier of needs requires we resist reductionism, but nuance doesn’t sell or spread. Inverting — if it spreads, it’s propaganda.

DDoS attack on life scripts

Everything so far has been abstract. You read this and think “What am I supposed to do with this? I still gotta knock out this rent?”

I’m 100% with you. I’m just some suburban family man who feels whipsawed by our cultural tug-of-war. Too unstrategic to take a side performatively and too jaded to subscribe to the demands of ideological purity. A coward in the eyes of believers, a fool to the ambitious. Pragmatic enough, idealist enough, and wholly unsatisfying. Like the dust I came from and shall return.

So I move from the abstract to practical rationalization to get on with the business of being. I took some walks with friends to hear different perspectives searching for one I can incorporate with my own feelings to anchor myself amidst the vertigo.

[I recognize that this might sound indulgent to even want to process this stuff but for the days you get between eras of dust you are entitled to be a snowflake just as someone else is entitled to ignore your ass. If you spend your professional life embedded in the very gears of how capital moves it’s natural to wonder about the vinculum between productive norms and their denominator.]

The following is a mish-mash of reflections that took shape in the past few weeks.

The nature of “winners”

Trump and most people with power and wealth are a subset of a group that is self-selected on a very pointy fact — they are heroically relentless at whatever game they’ve chosen. Depending on what you value, this is a feature or a bug but it’s a necessary condition for them to be where they are.

Trump’s life, zoomed out, is a picture of ever-larger victories. In his mind, these victories justify anything he wants. If his game is “give the people what they want”, he’s Ali, Jordan, Gretzky and Phelps combined. A tiny slice of that surplus, whatever calculus or crayons he used to compute it, could easily be tens if not hundreds of billions of dollars and it is cosmic right to take it. I don’t think this is the right way to think but it is A way to think. Go back to Adam’s post I plugged earlier — 2 stupid facts that rule everything.

You can’t relate to Jordan or Napoleon or Trump’s mindset. If you could the world would know of the product of your relentlessness.

Zuck, Andreesen, whatever…it’s just a game. They chose theirs and put on the blinders. That’s how they got where they did (plus luck — blinders aren’t enough to take you all the way, they are necessary but insufficient.)

That there are people who will maximize paperclips as if it were their purpose on earth should not surprise anyone whose eyes are open. Your overtures to any ideals that conflict with their goals might as well be whale sonar — they don’t even hear it if it’s not useful to them. The merit of ideals from the perspective of any other optimization function is simply not a criterion for them to consider it.

This is jarring to humans who are used to operating in a set of norms that is give-and-take. Where their concerns are considered. In Trump’s case, he’s an all-time great listener because his game is giving people what they want. If they wanted cancer, he’d give them that. Like any great power, it’s double-edged. Your view of him depends on which side of the sword you’re on, but the presence of the sword is not in question. Amassing wealth is first and foremost about giving people what they want. The method and products vary but its creation always has that bit in common.

Your own game

Ok, so we’re done with a long-winded but hopefully edifying version of “don’t hate the player, hate the game”. If you want to compete with that, you’re gonna need your own sword. Your own relentlessness. And if you aren’t going to pay the price to battle in their game then you must find your own.

That’s what my original tweet is about. If the only reason you work is for money then watching everyone slash-and-burn their way to riches will corrode your faith in prosocial values. You just feel like an honest sucker.

And this is bigger than the current moment. With automation accelerating, we are bombarded with questions about the value of what we do and ultimately our self-worth. The scaffolding of the set is becoming visible as the world gets more financialized.

[This past week, Kyla and Nick both wrote good pieces on the securitization of attention]

Humanity will be unable to outrun its creations IF the logic of efficiency decides we are costs as opposed to clients. I have little faith in either a) paperclip maximizers being able to consider such a question given their relentless focus and b) even if they could, how would the coordination problem be solved?

[I think a lot about Hardcore History’s Dan Carlin’s thoughtful answer about how humanity would undo itself. He thought about it on a level higher and tried to think of what class of problem it would flow from. He concludes the most diabolical kind — coordination.]

We rip open boxes like honey badgers to get to the fruit. You can’t put anything back in them. We might be able to change the slopes of the arrows of progress but not the direction. So while the curve is not yet exponential, we have to make our peace with the games others play but more importantly, we must understand our own.

You must direct your precious attention to your game as relentlessly as the psychos do to theirs. That’s the only way to decommodify yourself in a world that profits from your negligence of that duty.

There’s no quick way to explain how to do this. It’s the sum of everything I’ve ever put into the Motivation & Creativity and Affirmations & North Stars categories of my writing. But just to help with something immediately I can offer an inspiration and an exercise.

The inspiration is a short post by Matt Zeigler about the history of Sub Pop records:

We’re Not The Best, But We’re Pretty Good (3 min read)

It’s an encouraging reminder that if you focus on quality and survival you will get a chance at longevity. Which is the key to compounding in all the ways you need to flourish.

The exercise is something I did for myself because I can be a bit all over the place and find it settling to narrow my aperture. I tried to write a single line explaining what I do. Something narrow enough to focus, but wide enough to keep my identity from being brittle or defensive as the world changes.

I wrote:

I make words, pictures, and tools to help myself and others make decisions. If I can find others who value this and persuade them (ie build trust that I can help), the economy has a place for me.

Every object-level activity I do career-wise serves this definition. And what those specific activities are will change. Because how could they not.

Money Angle For Masochists

I will use this section as a boost for Thursday’s paywalled post:

• how an option trader extracts earnings from a vol term structure

The feedback on this one confirmed my sense that it would be one of the most important option posts I’ve written because it gives a walk-thru of a major topic that encompasses so many critical pricing ideas (there’s a downloadable spreadsheet included so you can get your hands dirty).

These are 2 additional excerpts from the paywalled section:

1. [Bonus observation: power law functions handle vol term structures well. Remember a power function can be converted to a line using a log-log transformation where your variable Y is vol and X is DTE so you can fit a linear regression. You can start to imagine a wider infra where you have a well-defined event calendar, extract implied events sizes everywhere, and fit base vol term structures to identify kinks, ie buy and sell signals. Suddenly it dawns on the reader what relative value vol trading looks like. Throw in layers of execution topics and you can see the basic truth — there isn’t any magic sauce it’s just fastening a thousand submarine doors before the thing can go anywhere. And every day the state of the art of little door details inches up.]
   
2. Trading vol around events is a major topic. At scale, quants will have more “proper” methods for doing this but I can tell you that a significant portion of my career earnings have come from understanding this stuff. (It was 20 years ago, about 2005, that I was starting to build this infra. All in Excel by the way.) The techniques improve. I’m not a quant as I’ve said many times. I don’t know the state-of-the-art but with some simple math and yea a lot of endurance, observing, noticing you can go quite far. Is this gonna turn you into SIG or Jane? Hell no, but these are the ant trails that take you to the questions. To a frame of mind that measures for and seeks contradiction. Notice how little broad opinions matter. Instead, you are trying to turn market prices into mini-hypothesis. Trades are tests against hypothesis. But it starts with measurement. Here are a few questions that option traders are asking every day…

 

From My Actual Life

Ok, this isn’t from my life but wtaf 🤯🤯🤯

Friends,

When I worked at Parallax I used to carpool with 3 good friends I worked with. On our rides back and forth, we frequently talked about trading situations that came up on the desk, “Yesterday a broker showed me this, I responded with that, how would you have handled it?”

It was the equivalent of game film for trading. I used to joke that if we recorded the calls on Periscope (remember Periscope?) it would be must-see tv for the fintwit crowd.

Given privacy and compliance, it was a non-starter idea. More broadly I thought that what I call“over-the-shoulder” educational material would be popular. The same way you watch Twitch to see how someone plays a game. Watching their mind work in real-time. Or watching somebody learn to play a song on the guitar by ear especially if they haven’t heard the song before. You pick up a bunch of stuff from what’s typically left out of a scripted tutorial. The mistake they make and how they correct it. Or how they started in the first place with the equivalent of a blank sheet.

I want to hear their reasoning out loud. I want it to be raw.

A few years ago, I watched this guy solve an insane sudoku as he narrated his thinking. It’s one of the most delightful YouTube videos I’ve ever watched.

On the heels of the Moontower Discord Voice chat I hosted a week ago, I thought heck let me try my hand at an over-the-shoulder video. I planned to talk about how to think about synthetic futures in the options market. I opened up my Interactive Brokers account option chains and a spreadsheet and just started riffing.

Since I did no prep, I figured instead of just recording a video I’d just livestream on X/Twitter. From one thought to the next, I end up covering almost an hour of info.

The feedback to what I saw as merely an experiment was tremendous. It got nearly 13k views and lots of love. I guess I’ll be doing more of this kind of thing.

I uploaded it to YT. I hope you find it useful.

 

An unscripted tour of key option concepts as I look at live data including:

• Synthetic futures
• Implied interest rates
• Reversal/Conversions
• Box rates
• Tracking structures in IB
• P/L attribution of a strangle
• Tickers used: TSLA IBIT SPX

Money Angle

Trump launched a memecoin on Friday night. One wallet (presumably his) owns 80% of it. At the time I’m writing this, he’s $24B richer.

You read that correctly. “B” like 🐝

Anyway, there’s a vesting period and no obvious way how he can monetize this without crushing the price. Maybe he can force a bank or another country to accept it as loan collateral. Or maybe he can demand the Treasury to buy it to diversify strategic reserves like its gold.

I’m kidding. I don’t think he can do such things. But also, if there’s a will there’s a way and I suppose a man named “Trump” ridin’ the mother of all heaters is some kind of cosmic onomatopoeia.

Anyway, this brings me to 2 tweets I saw pretty close together on the timeline.

In the early 2000s, I was in a fantasy football league that didn’t have a waiver system. Free agency 24/7 all week. The rules rewarded crackheads who followed football every second, ready to jump online to secure Denver’s backup RB when the starter’s knee exploded live TV. In other words, derelicts like myself who didn’t have a family in their 20s.

Today, I would never be in such a league. Not my speed anymore.

In fact, one of the reasons I left full-time trading was because it’s out of phase with how I want to live. I was never a news junkie. Having a job that required you to be on top of the news became an energy-suck. Playing a video game Trading for Living has a particular cadence.

Cadence. Rhythm. These are important dimensions in matching yourself to what you do.

Trading is different than a lot of desk careers. It’s a bell-to-bell job. Not a lot of homework. No deadlines.

But the best trade of the day can happen at 10:04 in the morning and if you were in the bathroom, you might as well have stayed home. Need to run an errand midday or meet someone for lunch? That can wait. For 30 years. You might make millions but you’re chained to a desk like a 9-year-old who has to raise her hand to go to the bathroom.

The point isn’t to say what’s better or worse. It’s just that trading has a pace and if you like to read peacefully, deliberate decisions slowly, and avoid paranoia you will find the environment stressful. Not to mention the boredom. A trader is like an EMT or firefighter on a slow day. Waiting but ready. Boredom is major problem for exactly the kind of people who think trading would be a great way to be in the action. You fold a lot of hands. But that takes discipline. Lapses in willpower or even a lack of sleep can seduce you into “loosening” your starting requirements to see the next card.

Those tweets above combined with FOMO and the proliferation of “if you can’t beat em, join’em” rationalization is gonna lure people towards spending their brain cycles on things that will feel deeply unfulfilling and that they are poorly matched to.

If you’re a financial thrillseeker these times are for you. If you are a builder or craftsperson, technology tools are accelerating. More power at your fingertips.

Either way…let your focus anchor you.

Why do you do anything? Maybe go a few whys deep. The alternative will be being battered by the waves. Adrift. And angry. There’s going to be a lot of games happening in front of your eyes. Some say there always have been, at least now it’s out in the open. Touche. But there are consequences to that too.

Are you better off or worse off?

It’s a deeply personal question. I am increasingly of the belief that within a decade, your own whys will be the only questions. We are leaving a world where people (at least people with the luxury to read substacks) just compile their parent’s script. Doing things because it just seems like the next thing to do.

It won’t make sense to do that in the same way it doesn’t make sense to describe a color as round or a chord as wet.

Money Angle For Masochists

I am sharing this with permission from a professional option mm who sent it to me. I deleted any identifying info. The person has been reading moontower for a long time and was graciously sharing.

Thought I’d share a few things I’ve learned. Most will be obvious to you, but maybe a nugget in here for one of your posts.

1) Starting with the obvious: market making is the hardest way to make an easy living. You can grind it out every single day scraping away ticks for edge, and at the end of the day your outcomes are decided by liquidity and volatility. They’re the two things you can’t control, and they’re the two things that determine your fate. This isn’t true for everyone, but it’s certainly true for [redacted].

2) I firmly believe that actively trading is not sustainable for sane human beings. Managing an options portfolio is like taking care of a baby. It’s a living organism that constantly needs to be tended to. If you neglect it, it will die. The amount of mindshare it takes up and context-switching is just simply unmanageable over long periods of time. The intensity it takes to perform at your best during market hours takes a beating on the human body. The guys on my team are [ages redacted] and look like they’re [redacted]. Besides a few partners, I don’t know a person here that doesn’t have a drinking problem. This is anecdotal, but I see it from other groups too.

3) Trading vol is easy. Managing a position is hard. I’m convinced you need to be borderline OCD to manage a book. Between the pruning of positions and the fine-tuning of the model, you have to have an insane attention to detail to get an acceptable slide.

4) You’re always underpaid until you’re a partner or PM. I won’t go into detail on this one because you did a whole blog post on it (maybe it was just a tweet idk). I’ll just say that you nailed it.

[Kris: See Getting Less Screwed On Compensation and adverse selection in the option job market]

5) Like most things, luck is the difference between 0 or hero in this industry and it doesn’t matter if you trade long or short. I’ve seen groups blow up in a matter of days. I’ve seen groups that should’ve blown up and then came back to make a fukin stupid amount of money from continuing to hold short.

From My Actual Life

5 years ago this same long January weekend was tough.

I tried to find the perspective in the stress. All turned out well, so don’t feel uncomfortable reading it.

Revisiting A Note From The ER

 

Stay Groovy

☮️

Moontower Weekly Recap

• how to become the main character on voltwit
• what are we supposed to learn to prep for the future?

Friends,

Happy New Year all. There are a lot of new subs which seems perverse since I haven’t posted in a couple weeks but I suspect the “don’t post and grow” strategy has its limits 🙂

It’s a convenient juncture to refresh the administrative aspects of the moontower playground.

First, about the substack:

Calendar

Moontower is published 3x per week.

Sunday: The OG letter now is almost 6 years old. The top section can be about anything while the Money Angle and Money Angle For Masochists section are for investors and traders respectively. Sometimes I throw in From My Actual Life which is what it sounds like — personal stories.

Wednesday Munchies: I share what I learned from something I read, watched, or listened to. Can be any topic.

Thursday Paywall: This tends to be more niche but of practical value to traders. I’d also use these to cover stuff I feel more comfortable discussing with a tighter audience.

These are guidelines. When you get down to it, I have an editorial queue but I go off-script all the time as topics spontaneously capture my attention.

Collaboration

For sponsors: The letter occasionally gets sponsored. I don’t advertise that this is possible, it happens by reverse inquiry but you can interpret the next few sentences as my advertising. The readership of this letter is a delightful mix of smart learners/strivers, wildly successful and influential hitters mostly in finance and tech, and parents. Since I have an 8 and 11-year-old, parenting topics have a lot of my mindshare and spill into the letter. Outside of the trading stuff, it is the most engaged segment of my inbound and that makes sense — none of us got an instruction manual to kids, but it’s like we all have parts of the map. There’s a lot to gain from comparing notes or hell just spewing exhaust (the double-entendre of that word in this context is absolutely intended).

If you want to sponsor the letter, reach out.

For people who want to guest post: These have been giant win-wins for readers and the authors.

Last year 3 were very popular:

• A Visual Primer For Understanding Options by
  KeyPaganRush
• Life Settlement Arbitrage by
  Rajiv Rebello
• Moneyballing College Admissions by my good friend Brent

Guest posts often are the result of weeks or even months of collaboration as I will act as both sparring partner and editor (I’m protective of the quality in here and whether I suck at this or not is not for me to decide but I do take whatever standards I have seriously). I don’t think I’m overstepping to say the writers find it fulfilling because they’ll give me the piece thinking it’s near its finished version and only to find that it’s got a long way to go. It’s not a fun process necessarily but one that will stretch your frontier a tad further.

If you want to use moontower as a venue to post let me know. If the idea resonates or if there’s a version that we can mutually agree I’d love to host it. If you have special knowledge but don’t have any distribution this can be a great jumpstart to a new hobby or more.

My other major project, which has turned into a growing business, moontower.ai is “option analytics with a point of view”.

There is a lot of development on the product side but one of the larger upgrades is on the community front — a Moontower Discord launched just a few days ago. This is available to all moontower.ai subs.

Montower.ai has:

• thousands of free subs who can access educational content and the Discord)
• hundreds of paying subs enabled for analytics, calculators, the chatbot, subscriber-only events, and Discord channel within the broader Discord.

Sign up moontower.ai (free or paid) and find your way to the Discord if interested.]

Finally, I’m working on some trippy moontower merch. Let’s just say it’s stuff that feels amazing to hold in your hands and definitely not typical swag.

Money Angle

The original moontower blog is https://moontowermeta.com/. The “meta” is an important word. Important enough that Facebook stole my language and turned it into their ticker. F’n Zuck. Leave some for the little people bruh.

The reason I used “meta” (besides the fact that moontower.com wasn’t available) was because a lot of things I think about are fairly meta. Knowledge is the object but how we acquire knowledge is the meta. Trading is a very meta discipline because games with counterparties require a solid “theory of mind”.

In the spirit of meta, I really enjoyed a recent post by Robot James titled:

Valuation Timing with Excel (6 min read)

It’s meta because it’s really about arming yourself with data analysis to confront a narrative or chart. It’s worth stepping through the article together to appreciate just how many meta-nuggets it contains.

First, we start with an object-level observation that you’ve likely encountered. I’ll quote freely from the post but all bold is mine:

You may have seen a lot of charts like this recently:

The conclusions people tend to draw from this chart are:

• there is an obvious and strong relationship between valuation and expected future returns (cheap = good, expensive = bad)
• valuation estimates are currently historically high; therefore, expected returns of the S&P 500 are historically low.

We should always be wary of drawing strong conclusions from stuff people share on the internet or in sell-side research.

There are a few reasons to be skeptical of the strong conclusions people tend to make on seeing this:

• the chart might just be wrong (people screw up financial data analysis all the time)
• 10 years is a really long time horizon
• all of the 10-year total returns are actually positive
• why are there so many points? How many 10-year periods has the index even existed for?!

The good news is that, with a few simple skills, we don’t have to believe what randos on the internet say.

Even if we can’t write code, we can use Microsoft Excel and free online tools to investigate these things ourselves.

James shows how simple it is to grab the data that would feed such a chart so we can manipulate it ourselves. One of the first manipulations is addressing the fact that such a chart is really derived from an extremely small sample size because each data point is highly overlapping to the others. A rolling 10-year return is comprised of 120 months so each new “sample” overlaps with the prior one by 119/120.

James starts the exploration by looking at monthly returns (instead of 10-year returns) vs CAPE.

Let’s turn back to James for interpretation.

Unsurprisingly, that looks like a big blob. (Anything with monthly returns on the y-axis will look like a big blob.)

[Kris: that bold statement is a useful bit of knowledge that comes from looking at financial data frequently]

What does James do next?

We can look at longer non-overlapping periods. Let’s keep with the 10-year forward window and look at decades.

The problem is that we now only have 15 observations! Ten years is a long time, and we simply don’t have that many unique non-overlapping ten-year periods. And we certainly don’t have many unique non-overlapping ten-year periods that are similar to the current market structure and competitive environment.

[Kris: that bold bit is an evergreen problem in finance because investing is biology not physics. Markets learn so output become inputs. What does that mean? Markets are more likely to fall AFTER everyone starts believing they can only go up. The “only goes up” is the output or observation that then becomes an input into how much risk investors take. There is always some price that peers back at history and says “not this time”.]

So James slices the data another way.

Plot the valuation metric itself…

whenever we see an effect, we should ask what other than our pet theory might be causing that effect to appear. In particular a lot has changed over that time period. The market looks nothing like what it did in 1900 today.

And, indeed, if we plot a time series of our valuation metric, it looks kinda drifty.

It’s not really reasonable, I don’t think, to assume that CAPE 20 would “mean” the same thing in 2024 as it did in 1900.

He tries another manipulation:

One cheap and dirty way we can make that metric a bit less drifty and more comparable over time is to standardize it by its values over a recent rolling window.

For example, here I’ve standardized it as a 10yr rolling score. (Not necessarily cos I think that’s the right thing to do – I just want to make a point).

Now it looks a lot more stationary. It stays in the same range. It doesn’t drift off. This is unsurprising cos we forced it to look like that.

[Kris: the bold is another lit bit of fingertip knowledge that you acquire from frequent contact with data.]

Yet, another manipulation:

Now, we can plot our next year’s returns vs this standardized z-score.

If we still see an effect when we do this, it would make us more confident in the valuation effect. If we don’t, it won’t destroy our confidence because we’ve made some pretty arbitrary and dubious scaling choices here.

Indeed, at least with this scaling choice, we don’t see the effect we are looking for.

That’s ok. That’s the nature of work like this. We’re just exploring, trying to break things. We try to look at things from as many different angles as we can and see how much of the limited evidence lines up.

[Kris: I just want to pause for beauty as my wife likes to say. James is spoon-feeding serum against chart crimes and charlatans who read “How To Lie With Statistics” as a manual].

James’ Conclusion

I think the evidence (and economic sense) supports the idea that high valuations are correlated with lower expected returns. But it’s nowhere near as clear-cut as the initial scatterplot suggests. We simply don’t have enough data, and the market is constantly changing underneath us, making it hard for us to draw strong inferences.

My conclusion

This points to an uncomfortable reality. If a data analysis was conclusive then everyone would do the thing prescribed until the data exhaust from the behavior was no longer conclusive. This is deeply reminiscent of what I call the Paradox of Provable Alpha.

Notice what James did.

He recognized that the data proves nothing but it’s simply too underpowered to accept or reject any claims. His prior barely gets updated: “I think the evidence (and economic sense) supports the idea that high valuations are correlated with lower expected returns.”

He goes to bed at night with judgment as his best guess much like a farmer’s almanac will do better at predicting the weather in a month vs some meteorological model.

 

Money Angle For Masochists

2 links

🔗Lifetime Achievement Award: Don Wilson (27 min read)

I stood next to several DRW traders when I was on the NYMEX. They were formidable in nat gas options especially the back end of the curve. Risk magazine profiles their founder whose generally difficult to find out about. Most prop firm founders somehow manage to keep a low profile despite their extreme wealth. (Meanwhile Bill Ackman and Ray Dalio want everyone to look at them. I guess I’m “just asking questions”)

 

🧵I got asked what my best and worst trades were (Twitter)

 

From My Actual Life

Holiday hibernation always leads to game recs.

🎲Left Center Right (1 min video)

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

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

Related posts:

• Mock Trading
• Mock Trading Options With Market Makers

💻Turing Machine (link)

This deduction game offers a unique experience of questioning a proto-computer that works without electricity or any sort of technology. (It uses punchcards!)

The Goal? Find the secret code before the other players, by cleverly questioning the machine.

This game is impressive. With 95 punchcards and 48 “verification” circuits (these are the logic gates you use to test your hypotheses against) they generate over 7 million problems! After one round you are just sitting there wondering how big-brain the designers are.

You can play competitively, solo, or coop. The game is beautiful and stimulates that part of your brain that’s trying to nail the logic for a complicated array formula in Excel. The game says 14+ but I’d say it’s fine for any middle-schooler that likes games.

Zak taught me how to play and then cooked me.

 

Stay Groovy

☮️

Friends,

A message for the 5th year in a row:

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

This break will be chill. After Thanksgiving’s Egypt trip, we have no travel plans and look forward to staying put, playing games, hanging out and watching the boys in their holiday hoop tourneys.

Random personal bits:

1. I’ll break out the game Ra out of the shrink-wrap it’s been in for the past year. It came out over 20 years ago. A game-obsessive former SIG director I was chatting with called it the best auction game he’s ever played. He thinks it’s Reiner Knizia’s masterpiece. RK is on the Mount Rushmore of tabletop game design not just for quality but relative to his field might be one of the most prolific humans ever. He’s designed over 700 games.
2. My 8-year-old Max likes guitar-driven rock and metal. I took this as tacit permission to buy him a cherry red Fender Squier for his size to put under the tree. I’m desperately trying to manifest a musician in my house. I got to play a bunch of songs with some friends Friday night. Max’s favorite is Bring Me To Life because he likes “when the music stops and suddenly the guitar goes chug chug chug”. My personal favorite from the evening.
3. It’s giving season. Don’t forget that donating stock is like the most tax-efficient hack ever. Apt timing for a reminder since 2024 made some big-risk takers newly rich lol. In general, most of our giving is concentrated in a few orgs we care about (as opposed to spreading it widely). They are mostly local which offers the chance to be more involved than just giving funds. Just sharing what we do because I know a lot of readers here have giving on their minds.
4. Besides an amazing start to moontower.ai’s life, 2024 was also my busiest year of writing. I nearly doubled my output from last year because of the Thursday posts and the educational writing for the software. Part of this holiday break will involve outlining a book. I kept toying with the idea but my friend
   Paul Millerd

   gave me advice that seems obvious once he said it — “just start outlining and as it comes together if you get more excited than you’re supposed to do it”.

Finally, I just want to say thank you for reading and supporting this whole moontower thing. It’s a privilege to have a direct relationship with an audience scattered around the country and the globe. As career landscapes shift I suspect as valuable as I think this is, I’m probably still undervaluing it. Maintaining it requires staying trustworthy, curious, and industrious to remain useful and relevant. Which is a reminder — everything is hard, but if you’re lucky to match to your work you are at least excited for Mondays.

Key Posts From 2024

I listed the key posts from the first half of 2024 in the Mid-Year Recap.

The key posts from the second half:

• Flash Post on GLD Vol (5 min read)
• Volatility Depends on the Resolution (6 min read)
• How Many Coin Flips Until Your Goal? (5 min read)
• A Winner That’s Really a Loser (4 min read)
• Not Getting Picked Off (6 min read)
• Derivative Income Bumhunting (7 min read)
• Options Are Always About Vol (8 min read)
• Math Shortcuts Traders Know by Heart (5 min read)
• The Option Market’s Point Spread (Part 1) (6 min read)
• The Option Market’s Point Spread (Part 2) (6 min read)
• The Book for Retail Option Traders (7 min read)
• Your Own Indie Band (5 min read)
• Adverse Selection in the Options Market (5 min read)
• Translating to Option Surface Language (8 min read)
• Tax Loss Harvesting on Levered Long/Short (6 min read)
• The Most Underappreciated Aspect of Trading (6 min read)
• Option Spellbooks (5 min read)
• Laying in the Weeds (5 min read)
• A Sale Is Made on Every Call (6 min read)
• Path, VIX, and Hit Rates vs. Expectancy (7 min read)
• Seat Arbitrage (5 min read)

Key readings from moontower.ai

• The Moontower Primer (7 min read)
• The Moontower Mission Plan (6 min read)

For a discussion of what’s on the horizon for moontower.ai this is a recording of our recent community zoom.

🌙Last Call🌙

You are welcome to use the ROBOTWEALTH promo code for 15% off moontower.ai plans. It expires tonite.

Stay Groovy and have a Happy New Year!

☮️

Friends,

This one is more investing-centric than a typical Sunday letter but before going there I want to add another gift guide to the lists I published this week.

🎁The 2024 Kottke Holiday Gift Guide

This list is extensive and will lead to link-diving into many well-curated offshoots.

One of those offshoots is an awesome guide directed toward children’s gifts (but there’s plenty even an adult would love!):

🦖The Kids Should See This (Gift Guide 2024)

Lots of nerdy ideas in there as well including a link to Purdue’s School of Engineering gift guide for kids!

On to trading stuff.

This past Wednesday I did an AMA with Kris Longmore’s RobotWealth community. Kris’ work and general way of being is a personal inspiration. I’m a big fan.

(His bootcamp is my #1 recommended course for retail trading because it’s grounded in both the practicality of trading but also in the conceptual — what is edge, where to find it and why it might exist)

This is all to say it was quite an honor to nerd out on his channel 🤓

​📽️Watch the replay of our conversation here.

Just a sampling of topics we discussed:

• Some differences between professional and retail trading
• How a retail trading operation can be set up to align with your life
• Good options trades and where to find them
• How important is modeling time decay?
• How important is backtesting for options strategies?

2 ideas that received some extra emphasis:

1) Traders are searching for contradiction not prediction

This is a callback to Measurement Not Prediction which explains why trading rests on “seeing the present clearly” as opposed to playing Nostradamus. The distinction might sound abstract or subtle. This section of a thread I wrote this week is a concrete example:

2) On timing vol

The topic of timing vol came up. And I shared something I suspect people might find surprising.

I had no edge in timing vol. In fact, I don’t think most professional vol traders have any edge in this. In other words, their edge doesn’t look anything like “vol in general is cheap here, let’s load up”. I almost always regret drawing lines in the sand about getting net long or short a bunch of vega. Did I tend to be leaning long vol when it was cheap and vice versa? Sure, but I was usually long or short for a considerable amount of time before it bottomed or peaked too, because markets love to stretch like they’re double-jointed ballerinas before reverting.

After getting humbled by a timing opinion gone awry, I always centered myself by going to back to basics. What does that mean?

The most basic decision in a trader’s arsenal, their reliable fastball so-to-speak is some version of:

“I’m buying this for X, because that is Y bid”

“I’m buying 1-month APPL straddles for X vol, because 3-month QQQ puts are Y bid”.

When you get away from decisions that take that grammatical form you are in the realm of “I’m buying this because the line went down”.

When you feel enough pain to accept that you did something wrong you will usually find this subtle switch in decision logic is the source. It stings the ego because re-focusing on the basics is admitting that you haven’t transcended the grind to become some market maven who just knows when something is about to turn.

(I think all traders subconsciously expect that their 10,000 or even 20,000 hours of practice will unlock that ability. These back-to-basic moments, if you are lucky enough to overcome your pride and negative p/l, to rediscover are humble reminders that markets are learning just like you are so the value of the 10,000 hours isn’t exerted on your ability to beat them, but instead on the practice of process so you have a chance of keeping up. There’s no “best”, only “next”.)

🌙Last Call🌙

You are welcome to use the ROBOTWEALTH promo code for 15% off moontower.ai plans. It expires tonite.

Money Angle

Several weeks ago I wrote Tax-Loss Harvesting On Levered Long/Short.

I recommend reading it to understand why it’s more valuable to have:

a gain of $200k + a loss of $100k

vs

a gain of $100k

The first grants you loads of optionality in managing current and future tax liabilities.

The rise of direct indexing, SMAs, and portfolio margining creates avenues for engineering the former in lieu of the latter.

I’ll tell you now you are going to hear more about tax-loss harvesting with a long/short extension in the coming year.

Why?

1) The knowledge and technology for managing this is becoming more widespread.

2) With US markets near all-time highs within a generational boom in stock-based comp, many people are sitting on massive gains in concentrated positions. Many are anxious to diversify but wary of the tax bill.

And a 3rd, more shadowy reason:

3) Passive index investing as an idea is begging to peak

Filed under “this is why we can’t nice things” — MSTR is going to be added to QQQ.

Another risk-loving corporate actor with an affinity for financial engineering spews negative externalities on your pension fund and passive savings by gaming a rules-based system. The only question is if Michael Lewis is gonna write a good book about this or be seduced into a bout of Stockholm Syndrome when he covers it.

Since you are going to hear so much about tax-loss harvesting a lot of it is guaranteed to be salesy. It’s an approach worth exploring but I’ll share substance* that recognizes the inherent tradeoffs and cost/benefit.

Here’s a few to get you started:

What They Don’t Tell You About Tax Alpha (8 min read)

Quorus is an upstart fintech player in the tax-loss harvesting arena. This article demonstrates how the devil is always in the details.

Direct Indexed Tax Loss Harvesting: Is the Juice Worth the Squeeze? (10 min read)

The Elm Wealth crew, as usual and welcome in our shiny object world, offer sober takes.

Tax Alpha Insider (Substack)

Brent Sullivan is a relentless investor advocate with the expertise and gall to dive into the details of financial products. His focus is on tax efficiency. I say gall because he’s like an investigative journalist in an industry where the incentives are to shill for a bigger pie in some new product area and hope to maintain your market share rather than waste energy debunking others’ marketing research.

You can search “tax-loss” on his substack and find lots of titles to titillate.

Money Angle For Masochists

More readers than normal found this week’s Path, VIX, & Hit Rates vs Expectancy highly educational. Coincidentally, that same morning Mark Phillips dropped Sympathetic Research which had significant overlap on the expectancy vs hit rate idea. He and I have been working on a project together in the background so some telepathy waves aren’t surprising!

If you are interested in options he’s a must-follow.

It’s paywalled but I also really enjoyed his recent Gulls for Bitcoin Bulls post part of his 50 Ways To Trade An Option series. He highlights some of the same things I’ve noticed and in fact talked about on our Moontower Community Zoom this week. He presents attractive pricing on the BTC option surface for people with a certain outlook. The problem I’m having is I want to do the opposite of the trade he highlights which means my idea is consensus and expensive. It’s a bummer for me, but also that’s the nature of trading — most of the time the thing you want to do should be baked. (A nice test of self-knowledge is to ask if you can tell the difference.)

From the mailbag

A moontower.ai user asked about oil volatility and correlation in the context of WTI and Brent crude. I did the editorial equivalent of showing him a cool scar:

Let me take these in turn.

USO is relatively illiquid these days relative to the futures options. It used to be more liquid. I spent the better part of a decade relative value trading it vs the futures options including doing create/redeems (I was constantly at OCC position limits — which have a horrible one-size-fits-all application).

Long-dated USO options are very interesting instruments because they are effectively long-dated options on a rolling CL1 contract. This is very different from say a 12-month futures option that references a less volatile CL12 contract.

This difference is why you can relative value trade it, but it’s a complicated model (actually I think a good interview question for a trader or quant is to come up with a model for this conceptually). It’s nice that it offers you an option chain on CL1 while the futures options don’t.

As far as Brent or for that matter heating oil and rbob which you didn’t ask about, the correlations to WTI change periodically when the fundamental details become bottlenecks in their respective markets. Refineries can’t just easily switch their slate between product grades so you can get over/under supply idiosyncracies. There’s an active “arb option” market which is options struck on the spread between WTI and Brent.

Further complicating matters is that Brent and WTI futures and futures options for a given month do not have the same expiries so when you do relative vol trades between them you end up with these residual calendar risks (brent options expiring a week earlier than WTI!)

There was a period of time where this is all I traded so to download all there is to say on this is impossible. You can make a career out of doing nothing else. If you like bloodshot eyes and your hair to be drained of youthful pigment of course.

 

Stay Groovy

☮️

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