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

☮️

Moontower Weekly Recap

• Gift Guides 2024
• Path, VIX, & Hit Rates vs Expectancy

The recent Economist lead article:

Meanwhile in reality:

I know it’s quaint in 2024 AD to let reality get in the way of a good story but this is what we know:

• The online sports betting industry is a low-margin business with high customer acquisition costs (ie relentless advertising and bonus promos).
• Like mobile gaming, most of the profits come from a small subset of customers. You can dress this up in VC-approved language: 80/20 rule, Pareto distribution, power law. But in gaming, these high-value customers are simply called “whales”. In sports betting, the right word is “addicts”.
• The profits come from sick people who churn. And why must they churn? Because eventually, they go broke betting 4-leg parlays. What’s a 4-leg parlay? It’s a clinical term for when a gambling site connects a Dyson to your bank account.
• If your best customers necessarily churn you have no choice except to hunt for more sick people and make sure you exact every last cent out of the ones you’ve hooked.
• The entire regulatory backdrop is complicit in a gigantic lie — that this is a free market. But you’re not allowed to win. It’s a rigged game. If you have an edge they limit your bet sizes to lollipop levels.
• The gambling 800 number PSA they include in the ads is weapons-grade irony. The business relies on the people who should be calling that number to instead believe that their luck is about to change for the better.
• Any attempt to rebut the disgusting contradictions with rhetoric (nobody is going to defend their behavior honestly with data) must contend with reality — sharp bettors try to mimic addicts or blend in with edgeless whales to “get down” (lingo for being able to place adequate sized bets). That tells you everything about the industry’s sympathies towards addicts.

Anyway, I had no reason to bring any of this up except for the Economist cover being a cat’s paw for hyper liberal market ideology. There are plenty of examples of free trade being pro-sum. This one undermines the message. An impressive journalistic own-goal for a publication titled “Economist”.

Make me czar and I kill the current system. Instead…all betting is on an exchange. You bid and offer just like futures markets. It won’t solve addiction but now smart bettors are valuable and rewarded, everyone gets better prices, and the incentives are towards volumes not seeking out sick people to cross faded markets.

More reading:

The Online Sports Gambling Experiment Has Failed (14 min read)
Zvi Mowshowitz

While I’m just ranting, Zvi shows his work in a convincing argument.

[Zvi is a sports gambler and a former Jane Street trader. His discussion of trading in this interview with Patrick McKenzie is fun.

Zvi’s substack tends to be mostly focused on AI but he does deep dives on various topics. The recent one on the Jones Act is shockingly hard to put down. The subject would appear to be dry (no glancing pun intended with Jones being about water-borne trade) but Zvi brings it to life.]

Related:

✍🏽Takeaways from The Odd Lots episode with pro sports gambler Isaac Rose-Berman

✍🏽Classics that remind us that thinking in averages or bell curves is often dead wrong. In many domains, especially business, a small number of customers or products drive most of the outcome.

1. Taylor Pearson’s How to Get Lucky: Focus On The Fat Tails (13 min read)
2. Kevin Kelly’s 1000 True Fans (19 min read)

I didn’t read Kevin’s post in 2008 when it dropped but it turned out to be incredibly wise.

On a related note, I owe you a thank you. Crossed 15k this week. The letter resumed strong growth, similar to early 2022, before the Twitter algo devalued my use of it by suppressing outside links, esp substack. Growth this year was brute force — I never wrote so much as in 2024.

Most importantly thank you for the privilege of not letting me talk to myself any longer than I already do.

Money Angle

A couple things upcoming this week.

Kris Longmore at Robot Wealth whose incredibly enlightening and generous story I boosted in case study on becoming a partner at a trading firm is hosting me for a live AMA with his community this Wednesday.

🤖Sign up here

If anyone asks me about BTC I’ll discuss my frustration with this dynamic in the option market (that’s a tell by the way):

In English, the tweet shows how IBIT is trading richer via the options than the cash price of IBIT shares. That means if you buy the IBIT synthetic future via the options you’ll underperform just buying IBIT. Likewise if you short the synthetic you will outperform an IBIT short.

Money Angle For Masochists

On Thursday I published a post called laying in the weeds, an expression I used regularly. Whether it was getting ready to pounce on an offer that accumulates suddenly, sniping with electronic eyes while streaming, or just keeping your mouth shut while others leak info, the lingo fits. It’s ultimately about execution — how do I get the price and size I want?

We can use that background to riff about execution which is easy but dangerous to develop lazy habits about (like laying in the weeds this is more of a professional topic because of the imperative to reduce slippage)

Here’s a common scenario in the voice option market.

Assumptions:

• An option is worth $.90
• A broker is bidding $.92 for 10,000 lots
• You and 3 additional market makers are offering at $.94. You know this because the broker, who we will assume is honest, relayed the full picture.

The case of simple 2 choice scenario tree

1. You hit the bid and get all 10,000. Expected profit = $.02 x 100 x 10,000 = $20,000
2. Nobody breaks rank, the offer is lifted with 4 market makers getting equal allocation. Expected profit = $.04 x 100 x 2,500 = $10,000

Seems like you should hit the bid. Except for that, if you do, next time all the offers are more aggressive. Tit-for-tat mutually assured destruction.

You get an interesting result if you unravel the game theory. Assuming none of the market makers are particularly axed in the option, and they all have a similar hurdle rate on how much capital they are willing to deploy for some amount of risk/reward you end up with a stable equilibrium that looks similar to what pre-communicated collusion would have resulted in.

[Aside from the dinosaur era: The way to get a lightly capitalized newcomer to your options pit to give up and go home is demoralizing attrition — trade everything for fair until they go away. I even remember days as a clerk on the specialist post where the boss would tell me to offer something so cheap on our exchange to embarrass a specialist on another exchange who ripped off the buyer at a higher price. The away specialist could lift our lower offer and lock-in a profit but they wouldn’t want to because by forcing the print they would make the customer feel bad about their fill. And if they did lock in the profit by trading with us, we were more than happy to incinerate money to make the customer think twice about routing around us in the future. I can remember the boss, crossed arms, still as Vader: “Keep offering. Filled? Reload.”]

More than 2 choices

Realistically, there are many scenarios. The option could have traded $.92 or $.93 with similar splits even if the first trader who hits the bid thinks she is getting the full bid size, but the broker being a diplomat who needs to deal with each of the market-makers daily decides to split it 4 ways anyway at the lower price. This result is common and explains why it doesn’t make sense to break price. They are unlikely to get the benefit unless they clarify with the broker that they are only going to hit the bid if they get full size (the broker weighs whether they should box the other 3 out and consequently piss them off).

How this plays out depends on your business relationship to the broker both in terms of how much you pay them and how useful you are in making fast, tight markets. When I was a local on the NYMEX I didn’t trade huge size but I was super-responsive so I could get those 25 and 50 lot berries. Those tight markets were also useful to the brokers who could use them “cuff” a related market or fish for business. At the fund, my value in the ecosystem was size, so I had leverage in setting the price of a larger order (maybe I could convince the broker to make the splits 4k, 4k, 1k, and 1k where I’m one of the larger allocations) but didn’t get the small layup orders.

We can get bogged down in scenarios forever, but the point is that this little game is being played all day. In the voice market and the electronic algo logic of sophisticated market-makers. If I divide all my profits by how many contracts I traded I end up somewhere in the penny ballpark. That’s the margin. That’s the difference between tossing coins for fair and a highly profitable business. It also means, that without a lot of reps it’s hard to tell if you have an edge.

Let’s do another example of cat-and-mouse.

An option is quoted $.21-$.23

You think it’s worth $.25

What do you do?

The correct answer is “it depends”. The first step to building a model for solving this execution problem is to identify the dependencies.

A few off the top of my head:

• If I lift, I make $.02 of edge on Y volume
• If I join the $.21 bid, what’s the probability I get hit (therefore making $.04) and how much volume would I get? Handicapping this depends on if the matching engine is time priority or pro-rata as well as if there is any priority that derives from my designation (customer, pro customer, professional, and more)
• If I bid $.22 and get hit I make $.03. But would that bid cause someone else to lift $.23s? I need some map of what other market observers think an option is worth.

Broadly, I need some priors about the distribution of what others think this option is worth based on existing bids/offers, the trades that have happened, and trades that have not happened (ie bids/offers that have been displayed but nobody cared on).

You could start with a simple equation.

P(getting hit) * volume when I get hit * edge to the bid_price= volume when I lift * edge to the ask_price

You can solve for P(getting hit) to find a breakeven for how often you’d need to get hit to compensate you for not lifting.

While this is stylized and simple it’s not an attempt to point to some abstract HFT optimization problem. It’s a reminder that reflecting on your execution techniques sharpens your thinking about trading, conditional edge, adverse selection. It’s less important for retail or if you don’t transact often, but for professionals and asset managers it is justifiably top-of-mind.

“A sale is made on EVERY call”

Remember Ben Affleck in Boiler Room:

And there is no such thing as a no-sale call. A sale is made on every call you make. Either you sell the client some stock or he sells you a reason he can’t. Either way a sale is made, the only question is who is gonna close? You or him?

Every time you trade with a broker someone gets the best of it. If you consistently get allocations for 60 contracts when you should have gotten 70 you are destroying 14% of your annual profit. Specialists and DMMs had rules about allocation quantities but there were also unwritten rules. You were expected to fight for even a single contract that you are “entitled” to and advocate forcefully for your interests constantly. The pugilism was built right into the training and culture. The stories of ruthlessness were culturally rewarded. As a junior trader, sticking it to a competitor or getting into a nose-to-nose screaming battle with a broker just to define boundaries was a way to earn stripes.

[This is not my native personality but you adopt what it takes. After all, the only point of this job is to make as much money as possible. Sure, the cost likely bore itself as chronic anxiety about work but only the most well-matched people get the luxury of getting paid and being comfortable. I don’t miss all the daily haggling but I did take it seriously since it was one of the most impactful contributions to profit for the reasons above.

One story I had brought to my attention in the past year — a PM who ran one of the large banks deriv desks reminisced about the AMEX when we were in the same pit. He’s a bit younger than me and apparently I made a big scene sticking up for him to a broker who tried to bully him in the pit. Nice to hear even though I don’t remember the exact incident. I do have a vague memory of lots of battles in that pit because it was a large crowd in a very liquid name.]

Final thoughts on this theme: if you manage a business that’s a game of inches, it’s good to periodically check-in and ask “are we clawing for those inches?”

Is everyone at the point-of-sale aware of what needs to be done or are we getting sloppy? Are we leaking info? Are we too nice? Would it pay to be squeakier? Are we paying the brokers we want to be paying? Are we paying the brokers the right amount?

Evergreen:

Stay Groovy

☮️

Moontower Weekly Recap

• laying in the weeds
• more profitable than OnlyFans?

Friends,

A bunch of quick observations and recs today especially around investing.

I went on Resolve Riffs with Adam Butler and Rodrigo. It was a totally free-form no prep episode. We mostly talked education and parenting stuff. There’s investing repartee on the back end.

A cool thing Rodrigo taught me was how he told Alexa “Enable ChatGPT”.

Then at breakfast you can prompt it with “Hey ChatGPT you are tutoring my 6th grader in Spanish (or her photosynthesis or whatever), quiz her”.

The kids are going back-and-forth over breakfast vocally with ChatGPT and their grades show it!

I started doing this with boys the next day. Zak’s Egypt test in social studies was Friday. We used the ChatGPT app to converse with the bot using the phone mic and speaker. We uploaded screenshots of the materials and it quizzed him. We even had to tell it to keep the questions focused on what was in the materials because it tried to quiz him on more Egypt facts than the test covers.

We got a bonus benefit too. It was a rainy day and Zak wanted to practice hoops in the garage so he asked ChatGPT to give him a dribbling and calisthenic workout to follow. I didn’t even know until he came back inside and I asked where he was. Good initiative bruh.

If interested, I talk about Math Academy in the interview as well. I also gave a talk to my local social club about it Wednesday night. The boys (and I) are still going strong with it and I don’t even tell them to do it. At least once a week they are logging XP before I wake up. If you’re looking for math enrichment for you, a kid, grandkid, student give it a peek.

Money Angle

I tweaked the Cockpit to highlight the change in markets since the close of Friday before the election. A lot of the gains were clipped a a bit this week.

A few things that popped out:

• Equity indices are up .5 to .9 standard deviations. In pure percent terms, IWM is the biggest winner (4.2%) and QQQ the laggard (1.9%)
• International stocks are down about .8 standard deviations…which ties into the next point…
• USD is up, yields are up slightly and gold is down 2 standard deviations or 6.5%
• Meanwhile BTC is the mirror image…up about 2.5 standard deviations or nearly 28%!
• There’s dispersion under the hood of equity indices with winning and losing sectors:
  • XLE (energy), XLF (financials), XLY (consumer discretionary), XLI (industrials) are all up between 1 and 2 standard deviations
  • Biotech and healthcare are down over 1 standard deviation (XBI is down almost 8%)
• Finally just looking at a few mega stocks:
  • TSLA is up 2.7 standard deviations or 25%!
  • NVDA is up .65 st dev or 4.7% while TSM is down .55 st devs or 3.7%
• Finally VIX is down from about 22 to 16 (and that includes a greater than 1 point rally on Friday)

💡A note on standard deviation:

I’m dividing the move sizes annualized, by the implied vol of a 2 week option on Friday November 1st.

This cockpit view is coming to moontower.ai this month. Our devs showed me the prototype this week.

I don’t know anything about the future so I follow a permanent portfolio/all-weather/cockroach type investing strategy. The focus is on diversification which is subscribing to a strategy that means always having to say you’re sorry.

Fyi YTD returns for a few major assets:

SPY and gold ~+23%

BTC ~ +115%

TLT (long term treasuries) ~ -4%

US dollar index ~ +5%

Eurostoxx ~ +8%

The InvestResolve team did a great podcast series teaching risk-parity which is another term for diversified portfolio (it’s just that the term “risk-parity” implies the weightings depend on the volatility and cross-correlations of the portfolio components).

I published a summary a few years ago:

InvestResolve Masterclass On Risk Parity (Moontower guide)

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

• The First Question: Security selection or asset allocation
• What True Diversification Really Is And How To Maximize It
• The 2 Fundamental Drivers That Determine All Economic Regimes

Rodrigo and Corey Hoffstein lead the Return-Stacked ETF push which is a way to maximize the benefit of diversification, namely maximizing return per unit of risk, via capital efficient leverage.

I think one of the coolest aspects of these products and the education around them is what it says about the waterline of investing knowledge — it’s constantly rising. What the institutional world understands about portfolio construction trickles down to retail on a lag but it does trickle down.

The lag depends on a mix of:

• regulation (ie portfolio margining)
• complexity (advisors are the messengers of new financial innovation to most of the public although there’s plenty of asset manager blogs or even blogs like this one that reach DIY investors)
• cost (fintech can scale the some of the analytical, data, execution, and funding over large user bases)

The Return Stacked funds bring the same techniques for structuring efficient portfolios that professional fund mangers have understood for decades to retail investors.

Corey does an amazing job explaining the principles in this video interview in a simple way:

🎙️Building a 100% Stock Portfolio Using Return Stacking (Millennial Investing)

My notes:

Rethinking How Your Portfolio is Constructed

Modern Portfolio Theory tells us to find the most diversified portfolio and lever it up. AQR’s Cliff Asness showed that if you take a portfolio that looks very close to a 60-40 and lever it up 1.5 times, historically, you would’ve had a higher return and about the exact same risk as equities. They call diversification “the only free lunch in markets”. It largely is. There’s no benefit really to foregoing diversification, but often you have to use leverage to really unlock those benefits.

Most people in 100% equities know that when you go to a 60-40, you’re de-risking your portfolio — you’re selling stocks to buy bonds that are less risky. The only way a 60-40 can compete, even though it’s more diversified, over the long run is by levering it back up to the same amount of risk.

• Notes on tax efficiency
  • Equity future inefficient: because it rolls (short-term cap gain)
  • Bond future is short-term cap gain but at 60/40 vs regular t-bonds (which are state tax-exempt but normal income at fed level — really depends on investor unique situation: https://www.simplify.us/blog/can-futures-based-bond-funds-improve-tax-efficiency)
  • Remedy: ETFs and Tax advantaged accounts OR trade-off for alpha
• Leverage
  • optimal math number vs behaviorally prudent number (difference bt risk capacity and risk tolerance)
  • Leverage has bad reputation but if only if you pair it with concentration. All disasters have leverage at the scene of the crime but usually to increase a concentrated position.
  • leverage + true diversification is an unlock and really the big thing that institutional investors understand that the average investor doesn’t. That’s the key innovation here — capital-efficient exposure to leverage while diversification keeps the risk unchanged
• Fees are lower than they appear because need to normalize them to amount of risk

Finally in the spirit of retail investing strategies getting smarter, the post I wrote on Thursday is on the topic you are going to hear a lot more about using your existing portfolio to collateralize a long/short overlay enabling the possibility of generating additional alpha as well a bank of short-term tax losses which can be applied in the future to match the timing of selling your large winners.

• Tax Loss Harvesting on Levered Long/Short

Money Angle For Masochists

🎙️Strong Source Interviews Ed Turner (70 minutes)

In this episode, we welcome Ed Turner, an experienced commodity trader with over a decade in the energy markets. Ed discusses his journey from trading base metals at Mitsubishi UFJ to leading Mandara’s trading desk.

Now a Senior Trader at Gunvor and an entrepreneur with Shogun Sakes Ltd., he shares insights on navigating oil trading dynamics, the transition from large firms to smaller, high-intensity environments, and the importance of risk management. Ed also explores the psychological aspects of trading and his shift from market-making to a more strategic, balanced approach.

Ed ran Mandara’s trading desk. They are not commodity traders trading around physical assets. Like my own past oil trading life they trade “paper barrels.”. Ed alludes to the same idea I’ve harped on before when interviewing candidates from banks who are used to trading around client flow— when you come to the buyside all you have is capital. You get a computer and a phone. Make money come out of it. The interview articulates what that problem looks like better than I’ve been able to. It’s a poker game. And it’s a grind. From listening to Ed it also strikes me that Mandara is a prop trading firm that resembles a market maker — philosophically and in practice. Ed wrote the firm’s risk manual and was heavily involved in education in addition to running the desk. Strong recommend.

Stay Groovy

☮️

Moontower Weekly Recap

• case study on becoming a partner at a trading firm
• Tax Loss Harvesting on Levered Long/Short

Friends,

Bill Watterson, creator of Calvin and Hobbes, gave a commencement speech in 1990. @Dylan0A4 tweeted this excerpt (emphasis mine):

We’re not really taught how to recreate constructively. We need to do more than find diversions; we need to restore and expand ourselves. Our idea of relaxing is all too often to plop down in front of the television set and let its pandering idiocy liquefy our brains. Shutting off the thought process is not rejuvenating; the mind is like a car battery—it recharges by running. You may be surprised to find how quickly daily routine and the demands of “just getting by” absorb your waking hours. You may be surprised to find how quickly you start to see your politics and religion become matters of habit rather than thought and inquiry. You may be surprised to find how quickly you start to see your life in terms of other people’s expectations rather than issues. You may be surprised to find out how quickly reading a good book sounds like a luxury.

Creating a life that reflects your values and satisfies your soul is a rare achievement. In a culture that relentlessly promotes avarice and excess as the good life, a person happy doing his own work is usually considered an eccentric, if not a subversive. Ambition is only understood if it’s to rise to the top of some imaginary ladder of success. Someone who takes an undemanding job because it affords him the time to pursue other interests and activities is considered a flake. A person who abandons a career in order to stay home and raise children is considered not to be living up to his potential—as if a job title and salary are the sole measure of human worth. You’ll be told in a hundred ways, some subtle and some not, to keep climbing, and never be satisfied with where you are, who you are, and what you’re doing. There are a million ways to sell yourself out, and I guarantee you’ll hear about them.

To invent your own life’s meaning is not easy, but it’s still allowed, and I think you’ll be happier for the trouble. Reading those turgid philosophers here in these remote stone buildings may not get you a job, but if those books have forced you to ask yourself questions about what makes life truthful, purposeful, meaningful, and redeeming, you have the Swiss Army Knife of mental tools, and it’s going to come in handy all the time.

(h/t Stefan for texting me the tweet)

I had never read that commencement tweet but it’s exactly what I tried to convey in Backsolving Your Ride On Earth. Paul Millerd in his book Good Work recounts being taken aback when I called him “ambitious”. No matter what you do for work there are compromises. Ambition is being ruthlessly intentional about your compromises. “I want a life that looks like this” means saying “no” a lot and bearing the cost of those no’s gracefully.

First of all, why is generally hard to say “no”? Because a lot of things you should say “no” to in order to stay in sync with your desire are hard to say “no” to. They are often things that convey status. They are enviable. It is hard to say no to things that are enviable even if in your heart you know they don’t matter much to you.

And why is hard to be graceful about saying “no”? Because we cope, overcompensate, and cry “sour grapes”. The person who rejects materialism after noticing that its borrowed desires were nothing but empty calories but then sits in judgement of others. They’re trying to have it both ways. They’ve done an admirable job of knowing themselves but don’t realize that freedom from the herd involves some loneliness. They try to build their own herd by taking an adversarial posture against their old team. The reformed financier who hates financiers (cough, Taleb).

It’s pointless to say “just ignore others” because it cuts so strongly against our social nature. A more useful framing is to remember that there are so many cultures, ways of being, and perspectives that whatever you are into, it’s not the first time someone was into it. It’s been decades since your neighbors were just the people on your block. The substack you are reading is a block on a neighborhood you never would discovered before the internet.

There’s a community for everything (my favorite metaphor for that is the ponyplay crowd). You’ll get more strength from a small community than the the toxoplasma of rage. Watterson’s suggestions are worth taking seriously but they are hard. They are deeply ambitious. To pursue them joyfully, without FOMO or overcompensation, you’ll need a culture that organizes its values similarly. A community that gives props for actions that bring you closer to those values. This will align your innate need for acceptance with behavior that reflects your authentic self.

The trick is doing this without inheriting the group’s collective defensiveness or, too often, derangement. Have some self-respect. Pick a counter-culture animated by generative impulses not animosity. Hating your past self is not a productive identity. It’s merely layover as you reweight trade-offs.

Money Angle

A few posts worth sharing:

People always put their money in futures they predict (5 min read)
Rohit Krishnan

Excerpt (emphasis mine and can’t emphasize that enough!!):

If you think the future of corporate American looks a lot like the past of corporate America, the Buffett portfolio is great. If you think the future’s pretty unknown, the Cockroach is great. If you’re in the middle, choose conventional wisdom. Note that these aren’t optimal, they’re just the financial equivalent of choosing the right sport to play. To do anything more is often the work of a lifetime. Investing has the highest delta between being the benefits to laziness and downsides to medium effort that I’ve ever seen.

Stocks and Flows (5 min read)
Byrne Hobart

This short post is educational and includes occasional ancillary observations that echo some of the stronger moontower themes.

For example, when Byrne writes:

making a market is closer to a job than an investment, but buying a passive portfolio is very much an investment—you’re getting paid to deal with volatility and the passage of time, not for any special effort it took you to click the “buy” button.

it reinforces my distinction between trading and investing (see this section from the moontower foreword to the newly released book Retail Option Trading by Euan Sinclair and Andrew Mack).

Money Angle For Masochists

Back on Oct 17th, I sold Z24 WTI (oil) 67 strike puts unhedged.

I explained my reasoning in this thread back when I did the trade. They were the equivalent to the USO Nov 15th 69 puts (I said Nov 22nd expiry but that was in error.)

I covered the WTI puts on Thursday morning. I published this thread when I covered them. Here’s a mildly edited version:

We’ll use the USO puts to write the post-mortem of a roughly 2 week trade. I hope its super educational.

Let’s start with the vibes.

Markets feel a bit, I don’t know, ahead of themselves. Everything but oil popping (til today). Rates & USD higher.

I’m less bullish on oil (and broadly bearish).

I cut oil length and bot t-bills this am.

Let’s get to the specifics of the “cutting length” trade because there’s many ways to do that. But my directional bias coincided with wanting to buy back my short vol (the moontower mantra — don’t touch the options without a vol lens).

Why?

Vol has sufficiently relaxed in oil since i sold the puts. The put skew was at normal levels when i first sold the 30d delta puts but the vol was high. Since spot/vol corr was positive that made them seem extra high!

• Today there almost no skew in those (now) .29d puts
• The implied vol is below realized (granted realized is on the high end of the range)
• AND the election is getting negligible vol premium in oil

These pics show the negative VRP and negligible event premium assuming 35% fair base vol (which comes from eyeballing the USO vol term structure).

While that explains the how and why of covering the position, let’s understand the p/l attribution of the position while I held it. We do this with the same type of charts I’ve been showing post-mortems with.

I’ll narrate where your eyes should go so it’s easier to learn.

If the puts were hedged the trade was steadily profitable except for 2 days out of 11 when the market popped.

See the yellow boxes on the red line:

Every day we can see the contribution to the hedged p/l from 2 components:

1. realized vol p/l (tug of war between gamma & theta)
2. vega p/l (change in IV)

The yellow boxes are examples of the daily decomposition.

Look what happened on Friday 10/25’s big down move…the hedged p/l was still positive. Yes, you got hammered on the realized p/l but vol got slammed! The put skew was in fact unjustified. The down move was what I call stabilizing to the market

Down moves aren’t normally stabilizing but my idea was that the Middle East conflict was driving the high vol so in this context a down move would be stabilizing so the total vol was unjustified if oil is lower.

(Ofc I was naked short the puts so that Friday was still a tough p/l day because i experienced a rough delta p/l but overall it was buffered by the puts underperforming)

Over the life of the trade, on a delta hedged basis you would earn $.45 being short the option from $1.76 On an unhedged basis it was $.78 (I actually made more than that because I actually sold the options closer to $2 bc the stock was about the same place it is right now, $71.85)

More importantly let’s look at the cumulative p/l attribution:

Almost all of it came from vega. The option was well-priced from a realized vol point of view!

This all ties in to my general gestalt of “short where she lands, long where she ain’t” bit. If vol is going to relax when it “gets there” then you don’t wanna use the option to bet it’s gonna get there. And if everyone thinks it’s “not going there” then when it does it will destabilize and you’ll wish you owned that option.

As a junior trader I remember selling calls bc “it’ll never get there”. I promise you there are many people who think like that. They don’t understand vol trading.

[An aside: That statement sounds more incendiary than I’d like. It troubles me I can’t fully articulate it. It’s a bit of an ink blot test. It’s understandable if you find that unsatisfying but the raw reality is indifferent to both of our dissatisfaction. In truth, there was a point of separation somewhere along the evolution of trading careers where as things got more competitive from the floor days to today, the traders who were copycatting disappeared into other parts of the business. When trading morphed from time/place advantage edge to positional edge it exposed the copycats lack of deep options understanding. Before Hollywood, there was a “me too” era on option pits across the land, where you only had to be savvy enough to identify who was smart and just make sure you yelled “buy’em” at the same time.

There are a lot of people who sound like they get vol trading. In fact I can’t fully imagine how hard it is for someone who’s not super experienced to tell the difference. The problem with codifying a “trading Turing test” is the same one interviewers have with candidates — as professional-grade info gets disseminated it’s hard to know if someone has earned it or parroted it.]

One of the savviest oil options traders I ever knew had a good formulation:

He’d buy those nominally cheap (but vol expensive) weeny puts when he was bullish. Because if the market dropped he just wanted to own what I call “the trap door” to protect what he really wanted to do…get balls long

In my own trading, i wanted to own the trap door. Whatever everyone thinks is impossible is the option i want. Stick’em in my back pocket and if it ever comes into play I’m the only one with 2 hands on the wheel

I admit this instinct was much stronger when i was trading a big book and i don’t have it as much now (that’s another discussion altogether).

Anyway, I hope this was overall educational. There’s an art to this game called options. If anything i maybe it gets the ole mind bicycle spinnin’ in such a way that even if you don’t trade options, it can mentally upgrade your whole investment decision OS.

From My Actual Life

We were a a “generic Brooklyn indie band album cover” for Halloween.

Stay Groovy

☮️

Moontower Weekly Recap

• THE book for retail option traders
• the option market’s point spread (part 2)

Friends,

We are in the midst of interviewing developers for moontower.ai (link to job description) to join our team of 3 on PT basis. While I’ve probably forgotten more about options than a healthy person should ever learn, I know nothing about company-building. Emi Gal, my co-founder, has built 2 companies. He founded a software biz in while still in college in the late 2000s. His hunch was “serving ads in internet videos” was going to be a big thing. Which sounds ridiculous today, but prescient when YouTube was only 2 years old, streaming was grainy, and smartphones were about to crown from Apple’s fallopian tube. He sold that first company after a decade and is currently the founder and CEO of Ezra where Yinh and I get our full-body MRIs (if you want a discount I know a guy).

When I wrote the Culture of 37signals, I mentioned how when I stumbled upon their manifesto and company handbook it reminded me so much of Emi and his business principles:

Emi’s a huge fan of them. He’s read all their books (and recommended Rework and Shape Up to me) but we also talked about how he came to many of the same conclusions while running his first company. I think that’s why reading the 37signals philosophy conjured Emi so strongly — the focused, can-do, undistracted spirit wrapped in a deep care for a holistic well-being which enables you to be excellent, rather than being at odds with professional commitment & performance.

Today, I’ll share another article we keep pinned in our shared digital workspace.

https://sahillavingia.com/work (8 min read)

Sahil is the founder of Gumroad. This article is an extremely candid look at how he arrived at his business approach. It echoes many of 37Signals’ values. It’s also up front about the drawbacks.

A few of the major points:

• Gumroad’s “Freedom at all Costs” model prioritizing flexibility, autonomy, and work-life balance over traditional corporate structures and rapid growth.
  • Flexibility and compensation: Gumroad offers competitive hourly rates ranging from $50 to $250, depending on the role. Employees track their hours and invoice weekly. Daniel Vassallo is an entrepreneur who gave them 10 hours a week for $120k/year.
  • Minimum viable culture: Gumroad’s culture is intentionally lean, lacking traditional perks and social events, focusing instead on providing flexibility and autonomy.
• Emphasis on written communication (37Signals and Amazon are famous for this)
  • “Instead of having meetings, people ‘talk’ to each other via GitHub, Notion, and (occasionally) Slack, expecting responses within 24 hours.”
  • “Everyone writes well, and writes a lot.”
• Potential drawbacks:
  • Limited growth opportunities: Gumroad’s structure offers limited traditional career advancement paths.
  • Lack of traditional benefits: Gumroad does not offer benefits like healthcare or laptops
  • The remote-first, asynchronous nature of work is isolating for many.

The topic of remote vs in-person gets people riled up. People talk their own book. Maybe not as directly as say a Class A office building investor who desperately needs asses in seats tenants but there are just many businesses that rely on large workforces. If you need a large workforce, your hiring standards are going to reflect that. Which means reaching down into mediocrity. To people who need to be babysat in-person. This is not a matter of judging, it’s just reality. Many people aren’t intrinsically motivated. They feel alienated by work that means nothing more than a paycheck. Many, maybe even most, didn’t even have a chance.

[You are very fortunate in this world to become properly matched to how you make a living so I don’t want to sound harsh. The whole topic of matching is deeply important — I think it’s the thing all parents hope for — give your kids lots of exposure to stuff so they have the best chance of matching to what they are good at. It’s not a silver bullet, but the lack of satisfactory matching will be a ball-and-chain for life. It’s not a recipe for thriving.]

My view is so anodyne it’s a stretch to call it a view — every business lies on a spectrum of how critical it is to be in-person or not. For businesses that straddle the line, it’s a matter of trade-offs. If you make them explicit as Sahil does, then your team will be a self-selected group whose preference sliders are in agreement. With more choices on how we can work, individuals can better match to a cadence that fits their personal frontier just like some people prefer startups to big companies. Being well-matched to the cadence and culture of your work environment seems like a key ingredient for loyalty and productivity.

My spicier take is that folks who get triggered by the wider array of work options have hazing mentality. “I had to struggle through crappy options, you should too.” Weird. When I wanted a dishwasher it was a luxury, now that innovation has made it a commodity, I’m…annoyed?

Have you ever sensed that some people get offended that someone else might choose to work less or remotely at the cost of more money or advancement? As if this is a form of entitlement even though this “lazy” person’s preferences still come with a cost. I call it learned helplessness on the part of the triggered. They grinded through a bunch of regretful choices and want to inflict the cruelty on others. To be charitable, I think in their heart, they are mad at their own narrow desire. They feel trapped maybe even duped by them, but they’re so pot-committed that they rationalize that this is the only way.

The greatest freedom is to be easy to please. You know someone who is high maintenance. But then it must follow than you know someone lower maintenance. It follows that there must always be someone less burdened than you by their desires.

There is someone out there who thinks they are outscoring you while you are blissfully unaware of the sport they’re playing. Jordan invented fake rivals tactically. Consciously. Some people create them to protect their egos and choices unconsciously.

The lyrics to this song have always been goated:

When you get down to it, the labor market is just that — a market. Price, inclusive of concessions in how one can work, comes down to scarcity and bargaining position. Sometimes the rockstar costs a ton of money. Sometimes they’d work for less if they can come and go as they please. When bosses whine about employees, it just sounds like they’re bidding below the market and frustrated they aren’t getting filled.

It’s like moaning about stocks being overpriced so you can’t get a better risk-adjusted passive return. I get it, you want things to be easier. Get in line.

On a related note, Paul Millerd just released his new book: Good Work.

I’ve known Paul for years now. I’ve written quite a bit about his first book Pathless Path which is deeply insightful and personal.

There’s a bit of a backstory to the new book’s subtitle: “reclaiming your inner ambition”. If you follow Paul, you’ll know he pushes back against life scripts in a major way. If you aren’t paying attention, you think he sounds like a slacker urging people not to work. In the book he recounts the call we had back in 2021 (we actually threw the video camera on which I believe was the first time I ever “recorded” for podcast. It was totally off-the-cuff.) I told him what I saw — that he was deeply ambitious. Stopped him in his tracks. He had not thought of himself that way.

I saw someone who was very deliberate about his choices. It takes a lot of nerve to do that. Nerve is ambition. The gall to believe you can get what you want from your time here.

(A lot of what is coded as “ambition” is actually a retreat from ambition. Paper-clip maximization as path of least resistance. Until it hits the ultimate ceiling — finding out its weights have been tuned to a local maxima.

There’s a time to be a hammer and time to navel-gaze. It’s the diabolical explore/exploit trade-off, the one-armed bandit problem, whatever you want to call it. I wish I had the wisdom to toggle between them well. It’s hard to judge even in hindsight nevermind real-time. One of these life-is-indifferent-to-your-desire-for-a-precise-recipe truths. If you are aware that you lean too much towards navel-gazing like I do, or being a hammer then you can likely benefit by consciously compensating.)

Paul went through a health scare in his 20s.

Those have a way of focusing you.

You realize time is limited and everyone is too concerned with themselves to actually care about you. I mean this in a good way — like nobody notices your bad hair day. As Morgan Housel learned as a valet, nobody cares about the person driving a Lambo. All they do is imagine themselves in a Lambo. At best we are props in the stories other people tell.

Once you figure this out, you can get on with the actual business of designing your life. Choosing your priorities instead of compiling the default program loaded by your upbringing or what society has put in front of your face which is neither random nor timeless — they’re just the messages that had enough financial ROI to justify their transmission.

Paul was on a traditional route. The MIT —> consultant —> grad school pipeline. There’s no problem with that unless you equate that with getting an A in life and find yourself disappointed when you discover there’s no grades, there’s no teacher, there’s no gold star. Or worse, that a gold star is BMW that you serve instead of it serving you.

And that’s the point. Is your time on earth serving the stuff you want to serve or serving an appearance in a world where nobody’s paying attention anyway?

Paul just backsolved. He loves travel. Having a family. And control over his compromises. It’s just an equation. Do the work that is valuable enough to sustain what you want that also aligns with your talent.

[Again, the importance of matching — Paul is very smart and can do lots of work that pays super well, but because he focused this ability into designing exactly the life he wants instead of choosing the money-is-pure-optionality-except-I’ll-never-exercise-any-of-the-options-because-I’m-hostage-to-collecting-options trap, he deployed his ability surgically to customize his experience on this grand ride called earth. Health scares remind you that options have expiry dates.]

Paul doesn’t pretend its easy. You must be ruthless about unlearning unexamined desires that come from our greatest but also overrated fear — social rejection. But anything worth something is not easy. You’re gonna bust your ass either way. You shouldn’t question if it’s worth it. If you do, you might be living someone else’s life.

I’ve been messing with Google’s NotebookLM this week.

☕Aside: This NotebookLM thing is pretty cool. You can upload up to 50 links/books/papers/video/documents and it will synthesize briefings and study guides from all the material. You can spar with it. Ask it questions. I fed it a book and asked it to surface all the paradoxes and ironies in the authors’ arguments and it pointed out several thoughtful contradictions. I gave it my Q3 review post from Wednesday and had it turn it into a conversational podcast. It even did a solid job of pronouncing my name. You can just give it Wikipedia articles and have it materialize the content into an audio interview. Andrej did this and uploaded the episodes to Spotify.

Money Angle

My friend Taylor sent me this terrific paper:

Investing In The Unknown and Unknowable (2006)
Richard Zeckhauser

It opens with the story of David Ricardo made a fortune buying British government bonds just four days before the Battle of Waterloo, even though he had no special military insight. His success wasn’t based on analyzing the military odds but on understanding market inefficiencies:

• Competition was thin
• The seller was eager
• He bet on the fact that his windfall, if Napoleon lost, would be much greater than what he stood to lose if Napoleon won.

I talked about this idea in my own way on Corey’s podcast. It’s counterintuitive but you can actually have more confidence in your judgement when you are evaluating a hairy situation when you realize it’s unlikely that your counterparty knows more than you do.

The Ricardo example is pretty good analog for why I bought teeny oil puts in early 2020 before the Covid shutdowns. If I’m wrong, it costs a minuscule bid-ask spread, and the put seller doesn’t know anything more than I do about the risk of a pandemic.

If a situation lends itself to analyzing reams of data I’m likely to stay away. I’ll know my effort is substandard to the effort the other side would make in taking the bet. When oil went negative, historical data is not a useful guide. The playing field is more level. It’s my reasoning against someone else. It’s not that I know something, it’s that the disparity about what I can know compared to the counterparty is small and in fact I might have the edge. So if the risk reward is favorable and the logic at worse is a toss-up, then my confidence is higher relative to a typical situation where someone else might have crunched all the permutations. My relative advantage (disadvantage) is higher (lower) in the low-info world.

The paper’s meta-lesson is how important the concept of adverse selection is. If you recall A Jane Street Alum Teaches Trading, Ricki Heicklen makes the case that understanding adverse selection is the most important part of trading. It is the thing that Jane, SIG, etc are obessed with — what is my edge conditional on getting filled? It might still be positive but it’s always less, in mathematical expectation, than a world in which you don’t get filled.

She has a great post with lots of day-to-day examples too:

Toward a Broader Conception of Adverse Selection (10 min read)

The Zeckhauser paper is terrific. I’ll just share this one excerpt with my emphasis:

Let us posit that you are 100% sure that an asset is worth more to you than to the person who holds it, indeed 50% more. But assume that she knows the true value to her, and that it is uniformly distributed on [0,100], that is, her value is equally likely to be 0, 1, 2, … 100. In a famous game due to Bazerman and Samuelson (1983), hereafter BS, you are to make a single bid. She will accept if she gets more than her own value. What should you bid?

When asked in the classroom, typical bids will be 50 or 60, and few will bid as low as 20. Students reason that the item will be worth 50 on average to her, hence 75 to them. They bid to get a tidy profit. The flaw in the reasoning is that the seller will only accept if she will make a profit. Let’s make you the bidder. If you offer 60, she will not sell if her value exceeds 60. This implies that her average value conditional on selling will be 30, which is the value of the average number from 0 to 60. Your expected value will be 1.5 times this amount, or 45. You will lose 15 on average, namely 60-45, when your bid is accepted. It is easy to show that any positive bid loses money in expectation.

The moral of this story is that people, even people in decision analysis and finance classrooms, where these experiments have been run many times, are very poor at taking account of the decisions of people on the other side of the table. There is also a strong tendency to draw the wrong inference from this example, once its details are explained. Many people conclude that you should never deal with someone else who knows the true value, when you know only the distribution. In fact, BS offer an extreme example, almost the equivalent of an optical illusion. You might conclude that when your information is very diffuse and the other side knows for sure, you should not trade even if you have a strong absolute advantage. That conclusion is wrong. For example, if the seller’s true value is uniform on [1,2] and you offer 2, you will buy the object for sure, and its expected value will be 1.5 times 1.5 = 2.25. The difference between this example and the one with the prior on [0,1] is that here the effective information discrepancy is much smaller. To see this, think of a uniform distribution from [100,101]; there is virtually no discrepancy. (In fact, bidding 2 is the optimal bid for the [1,2] example, but that the extreme bid is optimal also should not be generalized.)

The general lesson is that people are naturally very poor at drawing inferences from the fact that there is a willing seller on the other side of the market. Our instincts and early training lead us not to trust the other guy, because his interests so frequently diverge from ours. If someone is trying to convince you that his second-hand car is wondrous, skepticism and valuing your own information highly helps. However, in their study of the heuristics that individuals employ to help them make decisions, Tversky and Kahneman (1974) discovered that individuals tend to extrapolate heuristics from situations where they make sense to those where they do not.

On page 24, Zeckhauser has a more proactive spin reminding us that the problem is symmetrical — it’s rare for the other side to play an optimal strategy, which can offer opportunities for informed investors.

Money Angle For Masochists

An answer to prior reader mailbag question:

❓What’s your take on this—SPX 1M implied correlation trading at the 2nd percentile vs the last three years, while NQ is in the 25th percentile? Meanwhile, SPX IV is in the 30th percentile and NQ is in the 40th. My initial thought is that the component implied vols (IV) are inflated, and we’re seeing realized vol (RV) underperform IV this earnings cycle. Could short SPX vol could be getting hedged with NQ vol, potentially in anticipation of NVDA’s earnings?

I’d back up and start with what you’re measuring. Are your implied correlation numbers stripped of earnings vols? SPX might have a larger proportion of earnings events in the coming month, which could be skewing the numbers. Correlation tends to look lower when earnings are approaching because single-stock vols rise, making it crucial to use base vols (vols stripped of earnings) to get a cleaner estimate.

In practice, models might not account for this as there’s a lot of upstream judgement in cleaning the implied corrs for earnings where traders might prefer to look at dirty metrics and just understand how they can be wrong. Dispersion traders will have a “memory” of high or low dirty correlations around historical earnings seasons and how they played out.

Here’s a terrific interview with fellow vol trader bud Gary Selz that he recorded this summer with Jeff Malec at RCM.

Volatility Vultures: Hunting for Options Talent with Gary Selz of Zero Delta (YouTube)

In this episode of the Derivative we chat with Gary Selz, CIO and Co-Portfolio Manager of Zero Delta Funds. Gary shares his background growing up in Chicago and studying electrical engineering at Northwestern University. He discovered options trading through a financial engineering course and was introduced to a Chicago prop trading firm. Gary discusses his experience training as a new trader at the prop firm. He explains how traders are given time and support to learn before getting their own book to trade. Gary reflects on the diverse career paths that can lead traders to prop shops, from poker players to accountants. The conversation covers Gary’s transition from trading to investing his own money in volatility strategies. This led him to co-found Zero Delta Funds and launch a fund seeking talented volatility traders from across the globe and not always where you’d expect. Gary highlights their process of finding under-the-radar traders internationally and evaluating their sophistication. Gary and Jeff discuss various aspects of options trading, including the evolution of the market landscape. They analyze single stock versus index volatility trading. Gary shares insights on the current opportunity set and speculates on potential future market catalysts. Come join us as we dig deeper into option and vol trading and into the mindset of successful volatility traders.

Stay Groovy

☮️

Moontower Weekly Recap

• A Cockpit View of Q3
• Volatility term structure from multiple angles (part 2)

Friends,

A little fun.

I was born in the 1900s.

I follow lots of grew-up-in-the-80s/90s nostalgia accounts on Instagram because as much as I waaaaay prefer adulthood to childhood, I can’t resist stuff like this:

Iced tea.

We drank super sugary, Lipton powder iced tea from that orange thing. I mean nothing could beat that on a summer Wednesday afternoon after riding your BMX through a bunch of trails you were forbidden to follow because your mom heard “older kids” drank in those woods. Childhood bright spots were far from the eyes of adults. [An uncomfortable paradox considering how much time I spend with my kids — I started coaching 6th-grade hoops this week. Zak seems happy about it, but what if I find out later that I took that refuge away? Well, if it’s a risk, I’m obviously betting it’s a small one.]

One of the warmer features of 80s/90s nostalgia was how universal it felt. Diff’rent Strokes and Perfect Strangers. Not wearing helmets or seatbelts. [

PSA: romanticizing this is an invitation to have the rest of your takes heavily discounted. Our negligence was forgivable but it’s also dumb to think it was superior. I was in a bad car accident without a seatbelt AND got a concussion because I landed on my head after falling off my bike. I think these things happened in a 2-year period. Maybe I’d remember if I didn’t have a concussion. Fun fact. I’ve had 4 actually. None since I was 12. My parallel to this guy is weird. Or maybe it’s not. Maybe this is what happens when you GROW UP IN THE EIGHTIES! None of mine were from sports either.

While I’m on this Nate has this awesome 90-second bit about the people born between 1978-1980 specifically. It’s more profound than funny:

My favorite nostalgia trope is the “what movie did you watch that you were too young to see?”. I won’t turn this into a discussion about the difference between an “80s R-rating” and today, I’m sure there’s subreddit to to keep you occupied with that until Thanksgiving. I’ll just share my answers to that question:

Robocop

I haven’t seen it since I was 7. The early scene where the cop is shot to bits. The boardroom moment when the advanced model goes haywire. I can still remember where I was when I watched it…my living room on the Monday of a MLK or Presidents Day weekend when my dad was home during the day with us and rented it from the smelly VHS shop around the corner (this was pre-Blockbuster!). I think you could even rent the VCRs there.

Cujo

I saw this in my grandma’s living room in Brooklyn. Prolly similar age. It was on TV. They used to just play Stephen King movies on regular channels like it was the US Open. I had no fear of dogs until this lovely film put me on high alert. I got over it eventually but there was a German Shepherd in my neighborhood that changed all my walking routes like I was the kid in the Family Circus comic strips.

Poltergeist

Another one at grandma’s house. I made it to the tree scene. Haven’t slept since.

Honorable mentions:

• Neverending Story. Another f’d up dog. A flying mop from hell. I don’t even know, I think it might have been a good guy. Not in my eyes. Somebody shave and shrink that thing. Maybe it could make a normal face and not grin like molester (that’s kinda an eighties word now that I think of it)
• Ghostbusters. Low-key frightening. I didn’t need Gozer in elementary school. I really didn’t.

I may have mentioned it before, but it’s still funny to me — the first time I had a friend sleep over was in first grade and my mother rented us Terminator. The first one. Like the noir-chase movie. It’s not sci-fi. It’s straight-up horror. Arnold was Anton Chigurh — without the coin flips and with a steel exoskeleton.

That one didn’t traumatize me. I wrote about watching it with my sons last year when they were 7 and 10.

Maybe my mom was sent from the future to prepare me to prepare these boys for Skynet. That would make sense.

I wonder what the kid that slept over is up to now. His name was Michael Buckley. I’ll never find him with a name like that.

Money Angle

When this letter first started over 5 years ago, it was curation with blurbs. The feedback to the blurbs were the breadcrumbs that led me to writing. I realized the things I knew were interesting to others. That possibility didn’t occur to me until then.

Now that I spend more time writing, working on moontower.ai and one-off projects I actually read less articles than I used to. (Plus not being chained to a desk even if the market is slow — the worst part of trading jobs is boredom and weeks that feel like 2017. Reading was my filler activity.) I still read quite a bit but I’ve noticed the file where I store the articles I read is growing more slowly.

[I also have a file for every restaurant I’ve been to since 2012 organized by location — this started because I’d draw a blank when someone asked for a rec and I hate feeling useless. You may think it’s crazy but I think it’s an appropriate memory-crutch for someone who had 4 concussions :-]

A small percentage of the articles I read get saved in a “remember to share this in moontower” file usually with some notes and sometimes with lots of notes. I often debate just dropping them all in one post and clearing the backlog but…nah. It would devalue them. These posts swam strong enough to keep my attention, I wanna see them thrive.

Here’s the IV drip for today:

Poker As A Whetstone (5 min read)
Joel Rubano

This is an excerpt from Joel’s book Trader Construction Kit talking about the use of poker in trader ed. It uses the loose/aggressive strategy as an explicit instantiation of balancing risk vs reward but more importantly gives you an axis to help you place your approach into already-theorized language.

Why Are Companies That Lose Money Still So Successful? (8 min read)
HBR

Excerpt:

We show that accounting losses for a 21st-century firm no longer represent what they used to for a 20th-century firm. An increasing number of firms now report losses because of a deficiency in accounting, not because of poor fundamentals or wrong investment decisions. Distinguishing between losses that are a result of accounting deficiency and those that reflect genuine business problems is increasingly one of the most important challenges confronting managers, analysts, boards of directors, and policy makers. Failing to do that work could lead to faulty decisions, such as firing a talented CEO, prematurely closing a promising line of businesses, wrongfully selling a highly remunerative stock, or laying off productive scientists and marketers.

Key points:

👉Intangibles-heavy economy: growing disconnect between the emerging economic realities and the underlying accounting principles. These principles were designed primarily for industrial and infrastructure-intensive companies and still consider only physical things as assets. Specifically, the U.S. Generally Accepted Accounting Principles (GAAP) consider investments made in intangibles as operating expenses, not as building blocks for the future. As a result, the more a 21st-century company spends on building its future, the higher its reported losses.

1. The balance sheet is inadequate for assessing a firm’s true resources. For example, Apple’s most important assets — its highly recognizable brand, world-class R&D, and customer relationships — are nowhere to be found on its balance sheet. When Apple spends to enhance its technology and brand, financial statements fail to recognize that it’s creating value.
2. The net income number, when reported as a loss, often becomes a meaningless measure for assessing a firm’s performance, because it’s calculated after deducting the firm’s most important investments.

👉The author shows studies where they re-compute the financial statements but treat intangibles like physical assets with depreciation expenses over time rather than expensing the funding of intangibles as if they are costs not investments. They also explain how they validated their methods.

The paper reminded me of 2 older pieces.

📃Negative Equity, Veiled Value, and the Erosion of Price-to-Book (12 pages)
OSAM

A good one that gets into the details. Published in 2018.

📖More Than a Numbers Game: A Brief History of Accounting’s coverage of the history of intangibles (chapter 10).

My notes here. Great book in general.

Money Angle For Masochists

I unlocked this paid post. Vertical spreads are such key primitives in the option world. They are clean, model-free ways to express a view.

I hope you find it useful. I’ll settle for interesting even.

🧠a deeper understanding of vertical spreads (9 min read)

Final reminder on this promotion since it ends tomorrow:

Get 12 months of PiQ premium access to the Hi-IQ tier with the code ‘MOONTOWER‘.

Just apply it at checkout:

👉https://app.piqsuite.com/

From My Actual Life

One last thing about the 4 concussions.

Yinh made a magazine for our wedding guests that was a tribute to all of them in the style of New York which we enthusiastically subscribed to. Not New Yorker. That’s for literate people. New York magazine.

One of the sections was fun facts about every guest. That’s where she shared my 4 concussion fact. There’s a tiny worm in my brain that suspects her choice of fun fact was a long-game alibi in case this whole marriage thing hit an iceberg.

Well, this Wednesday is 15 years.

[And 21 years since we got together. There is a real tranche of moontower readers who weren’t even zygotes then.]

Anyway, if you remember the Approval Matrix, you’ll dig the ‘zine idea.

Celebration-wise, it’s gonna be chill. Originally Yinh got us tix to see Nate Bargatze in Vegas for Wednesday night but he postponed the show until his residency next year. The real kick in the teeth was when Yinh revealed that one of our closest couple friends had booked tix to fly in and surprise me but now it’s a plan for another time.

Dammit Nate.

Stay Groovy

☮️

Moontower Weekly Recap

• Dragonfly Eyes
• Volatility term structure from multiple angles (part 1)