Category: Newsletter Thoughts

what happened to summer reading?

My 12-year-old is a compulsive reader. To the point of me telling him, put the book down, go do stuff.

My 9-year-old has no interest in reading.

No bowl of porridge in this house is “just right” apparently.

I’m more alarmed by the 9-year-old of course. Our environment conspires against reading so it’s more important than ever to establish the habit early.

Warning: Old man yells cloud moment

My niece goes to the local public school that is consistently in the top .50% of public high schools in the US. She had no summer reading assignment. She will be asked to read 3 books all school year.

Going into my freshman year of Christian Brothers Academy in NJ back in 1992, I was assigned 7 books to read over the summer. Every summer after that, we were assigned at least 4 books just for the summer. CBA is a good high school, but I live next to one here in CA and our local public school has a better reputation on academics. What if you don’t go to a top school? Or is this lack of reading some perverted thing that top schools do?

(My niece is taking AP Physics as a sophomore which used to be unheard of, so times have changed in good ways too. My niece’s favorite subjects are math and science and I’d like to think I had something to do with the math, given all the nerdom I’ve embarrassed my family with. What is not encouraging is discovering that there are only 4 girls out 40 students in AP Physics.)

Is standardized testing reflecting a reduction in standards or just the reality of dilution that you’d expect if a large majority of HS kids expect to go to college, as opposed to a few generations ago?

Some time back, I was in a conversation on Twitter about the SATs. Someone mentioned that the scores are inflated these days and you can’t compare across time. I didn’t realize that but sure enough one of my Twitter mutual follows chimed in. No other than Princeton Review founder Adam Robinson. He left a brief reply saying that while it’s complicated, it’s true.

Poking around online (a good place to start is the wiki for History of the SAT) you will find many calculators that allow you to compare SAT scores or at least percentiles between years. There have been many adjustments over the years, but the largest was the 1995 recentering. While my math score would be basically flat after adjustment my verbal was an 800 by today’s system. I haven’t delved into the decomposition of why verbal scores needed to be so inflated, but since the recentering occurred as early as 1995, it doesn’t make me think this is related to the decline of reading that has garnered more recent attention.

[To further muddy the waters, I’m not sure to what extent SAT verbal evaluation maps to any real-world acumen. I got a 790 on my SAT II – Writing, one of these subtests you needed to take back then, despite being a B student in English and literally walking out of a play at BAM in my late 20s because I was too stupid to understand it. My wife and I still think about how high-schoolers were laughing at Shakespeare’s jokes as we sat puzzled, trying to get cultured, only to give up by intermission. Yes, I write on the internet today, but it’s more like talking than the writing I saw in the classics I was forced to struggle through.]

This post by James Marriott suggests the decline is real. And why wouldn’t it be? Everyone sold 4 hours of their day to the biggest companies.

(Hey, at least your absentee ownership of cap-weighted indices investments benefit.)

The Dawn of the Post-Literate Society (James Marriott)

Select excerpts:

  • “To engage with the written word”, the media theorist Neil Postman wrote, “means to follow a line of thought, which requires considerable powers of classifying, inference-making and reasoning.”
  • In America, reading for pleasure has fallen by forty per cent in the last twenty years. In the UK, more than a third of adults say they have given up reading. The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
  • The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
  • Our universities are at the front line of this crisis. They are now teaching their first truly “post-literate” cohorts of students
  • “Most of our students”, according to another despairing assessment, “are functionally illiterate”. This chimes with everything I’ve heard in my own conversations with teachers and academics. One Oxbridge lecturer I spoke to described a “collapse in literacy” among his students.
  • The transmission of knowledge — the most ancient function of the university — is breaking down in front of our eyes. Writers like Shakespeare, Milton and Jane Austen whose works have been handed on for centuries can no longer reach the next generation of readers. They are losing the ability to understand them.
  • Laid out on the page their arguments would seem absurd. On the screen, they arepersuasive to many people.
  • Postman cites the Lincoln-Douglas debates of 1858 in which both presidential candidates spoke at incredible length and in remarkable detail as one of the summits of print culture: Their arrangement provided that Douglas would speak first, for one hour; Lincoln would take an hour and a half to reply; Douglas, a half hour to rebut Lincoln’s reply. This debate was considerably shorter than those to which the two men were accustomed . . . on October 16, 1854, in Peoria, Illinois, Douglas delivered a three-hour address to which Lincoln, by agreement, was to respond…When Postman was writing in the late 1980s, such debates were already impossible to imagine.

Marriott’s post is dramatic. Its strength is more in diagnosis than in bridging the decline of traditional literacy to its ramifications.

A librarian writes a terrific criticism of the post which articulates the concern I feel but didn’t put my finger on.

The real crisis isn’t that people can’t focus. It’s that we’ve built information environments actively hostile to contemplation while simultaneously lamenting the loss of contemplative practices. We’ve created attention casinos and then diagnosed the players with moral weakness. This is a design problem masquerading as a cultural catastrophe.

Consider what actually happens in a modern library. We don’t just house books anymore. We create what I think of as “containers for attention”: spaces and practices that enable different kinds of engagement with ideas. The silent reading room remains sacred, but it’s joined by maker spaces where people think with their hands, recording studios where oral traditions find new life, collaborative zones where knowledge emerges through conversation. We’re not abandoning literacy. We’re expanding what literacy means.

Marriott is right that we’re living through a profound transformation. Where he sees collapse, though, I see metamorphosis. The challenge isn’t to preserve the aristocracy of print but to democratise the conditions for deep thought across all modes of engagement. This means designing information environments that support sustained attention, teaching people to navigate multiple modes of meaning fluently, and recognising that human understanding has always been richer than any single medium could contain.

The future Marriott fears, where we’re all reduced to emotional, reactive creatures of the feed, is certainly one possibility. But it’s not inevitable. The teenagers I see who code while listening to philosophy podcasts, who annotate videos with critical commentary, who create elaborate multimedia presentations synthesising dozens of sources: they’re not the degraded shadows of their literate ancestors. They’re developing new forms of intellectual engagement that we’re only beginning to understand.

The question isn’t whether civilisation will survive the death of traditional literacy. It’s whether we’ll have the wisdom and imagination to build institutions, practices, and spaces that support human flourishing in an age where meaning moves through light and sound as readily as through ink. That’s the real work ahead, and it’s far more interesting than mourning a monopoly that was always going to end.

There’s a compromise between Marriott and the librarian. A minority of people will have the “wisdom and imagination” to be empowered by new mediums and not be “reduced to creatures of the feed”.

Maybe it’s not your fault or “moral failing” if you can’t focus when We have decided to outsource our principles to “what’s good for the market is Good”.*

* I’m not sure when this happened but here’s how I see it:

When I was a teen, the Jeff Lebowski played by David Huddleston’s character was the villain. Jeff Bridges’ Lebowski was the hero.

Your revolution is over, Mr. Lebowski. Condolences. The bums lost.

The dude extracts a mini-revenge when he tricks Brandt into giving him an expensive rug.

The spirit of today would be to lock the Dude up for pulling one over on a guy who turned out later to be an empty suit:

We did let him run one of the companies briefly, but he didn’t do very well at it…I give him a reasonable allowance. He has no money of his own. I know how he likes to present himself. Father’s weakness is vanity.

You don’t need to mainline kumbaya to notice how much rebellion-coded acceleration optimism is corporate-cuck fluffery.

Here’s a fun one:

There are only 2 possible reactions.

  1. You hate this interview
  2. You love this interview and hate yourself

I’m still stuck in the 90s, so you can guess where I live on this.

In honor of Jane Goodall, I’ll share a letter I saved in my notes years ago sharing her exhortation to make kids read:

Dear Children,

I want to share something with you — and that is how much I loved books when I was your age. Of course, back then there was no Internet, no television — we learned everything from printed books. We didn’t have much money when I was a child and I couldn’t afford new books, so most of what I read came from our library. But I also used to spend hours in a very small second hand book shop. The owner was an old man who never had time to arrange his books properly. They were piled everywhere and I would sit there, surrounded by all that information about everything imaginable. I would save up any money I got for my birthday or doing odd jobs so that I could buy one of those books. Of course, you can look up everything on the Internet now. But there is something very special about a book — the feel of it in your hands and the way it looks on the table by your bed, or nestled in with others in the bookcase.I loved to read in bed, and after I had to put the lights out I would read under the bedclothes with a torch, always hoping my mother would not come in and find out! I used to read curled up in front of the fire on a cold winter evening. And in the summer I would take my special books up my favorite tree in the garden. My Beech Tree. Up there I read stories of faraway places and I imagined I was there. I especially loved reading about Doctor Doolittle and how he learned to talk to animals. And I read about Tarzan of the Apes. And the more I read, the more I wanted to read.I was ten years old when I decided I would go to Africa when I grew up to live with animals and write books about them. And that is what I did, eventually. I lived with chimpanzees in Africa and I am still writing books about them and other animals. In fact, I love writing books as much as reading them — I hope you will enjoy reading some of the ones that I have written for you.

Moontower #288

Friends,

My 12-year-old is a compulsive reader. To the point of me telling him, put the book down, go do stuff.

My 9-year-old has no interest in reading.

No bowl of porridge in this house is “just right” apparently.

I’m more alarmed by the 9-year-old of course. Our environment conspires against reading so it’s more important than ever to establish the habit early.

Warning: Old man yells at cloud moment

My niece goes to the local public school that is consistently in the top .50% of public high schools in the US. She had no summer reading assignment. She will be asked to read 3 books all school year.

Going into my freshman year of Christian Brothers Academy in NJ back in 1992, I was assigned 7 books to read over the summer. Every summer after that, we were assigned at least 4 books just for the summer. CBA is a good high school, but I live next to one here in CA and our local public school has a better reputation on academics. What if you don’t go to a top school? Or is this lack of reading some perverted thing that top schools do?

(My niece is taking AP Physics as a sophomore which used to be unheard of, so times have changed in good ways too. My niece’s favorite subjects are math and science and I’d like to think I had something to do with the math, given all the nerdom I’ve embarrassed my family with. What is not encouraging is discovering that there are only 4 girls out 40 students in AP Physics.)

Is standardized testing reflecting a reduction in standards or just the reality of dilution that you’d expect if a large majority of HS kids expect to go to college, as opposed to a few generations ago?

Some time back, I was in a conversation on Twitter about the SATs. Someone mentioned that the scores are inflated these days and you can’t compare across time. I didn’t realize that but sure enough one of my Twitter mutual follows chimed in. No other than Princeton Review founder Adam Robinson. He left a brief reply saying that while it’s complicated, it’s true.

Poking around online (a good place to start is the wiki for History of the SAT) you will find many calculators that allow you to compare SAT scores or at least percentiles between years. There have been many adjustments over the years, but the largest was the 1995 recentering. While my math score would be basically flat after adjustment my verbal was an 800 by today’s system. I haven’t delved into the decomposition of why verbal scores needed to be so inflated, but since the recentering occurred as early as 1995, it doesn’t make me think this is related to the decline of reading that has garnered more recent attention.

[To further muddy the waters, I’m not sure to what extent SAT verbal evaluation maps to any real-world acumen. I got a 790 on my SAT II – Writing, one of these subtests you needed to take back then, despite being a B student in English and literally walking out of a play at BAM in my late 20s because I was too stupid to understand it. My wife and I still think about how high-schoolers were laughing at Shakespeare’s jokes as we sat puzzled, trying to get cultured, only to give up by intermission. Yes, I write on the internet today, but it’s more like talking than the writing I saw in the classics I was forced to struggle through.]

This post by James Marriott suggests the decline is real. And why wouldn’t it be? Everyone sold 4 hours of their day to the biggest companies.

(Hey, at least your absentee ownership of cap-weighted indices investments benefit.)

The Dawn of the Post-Literate Society (James Marriott)

Select excerpts:

  • “To engage with the written word”, the media theorist Neil Postman wrote, “means to follow a line of thought, which requires considerable powers of classifying, inference-making and reasoning.”
  • In America, reading for pleasure has fallen by forty per cent in the last twenty years. In the UK, more than a third of adults say they have given up reading. The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
  • The National Literacy Trust reports “shocking and dispiriting” falls in children’s reading, which is now at its lowest level on record
  • Our universities are at the front line of this crisis. They are now teaching their first truly “post-literate” cohorts of students
  • “Most of our students”, according to another despairing assessment, “are functionally illiterate”. This chimes with everything I’ve heard in my own conversations with teachers and academics. One Oxbridge lecturer I spoke to described a “collapse in literacy” among his students.
  • The transmission of knowledge — the most ancient function of the university — is breaking down in front of our eyes. Writers like Shakespeare, Milton and Jane Austen whose works have been handed on for centuries can no longer reach the next generation of readers. They are losing the ability to understand them.
  • Laid out on the page their arguments would seem absurd. On the screen, they arepersuasive to many people.
  • Postman cites the Lincoln-Douglas debates of 1858 in which both presidential candidates spoke at incredible length and in remarkable detail as one of the summits of print culture: Their arrangement provided that Douglas would speak first, for one hour; Lincoln would take an hour and a half to reply; Douglas, a half hour to rebut Lincoln’s reply. This debate was considerably shorter than those to which the two men were accustomed . . . on October 16, 1854, in Peoria, Illinois, Douglas delivered a three-hour address to which Lincoln, by agreement, was to respond…When Postman was writing in the late 1980s, such debates were already impossible to imagine.

Marriott’s post is dramatic. Its strength is more in diagnosis than in bridging the decline of traditional literacy to its ramifications.

A librarian writes a terrific criticism of the post which articulates the concern I feel but didn’t put my finger on.

The real crisis isn’t that people can’t focus. It’s that we’ve built information environments actively hostile to contemplation while simultaneously lamenting the loss of contemplative practices. We’ve created attention casinos and then diagnosed the players with moral weakness. This is a design problem masquerading as a cultural catastrophe.

Consider what actually happens in a modern library. We don’t just house books anymore. We create what I think of as “containers for attention”: spaces and practices that enable different kinds of engagement with ideas. The silent reading room remains sacred, but it’s joined by maker spaces where people think with their hands, recording studios where oral traditions find new life, collaborative zones where knowledge emerges through conversation. We’re not abandoning literacy. We’re expanding what literacy means.

Marriott is right that we’re living through a profound transformation. Where he sees collapse, though, I see metamorphosis. The challenge isn’t to preserve the aristocracy of print but to democratise the conditions for deep thought across all modes of engagement. This means designing information environments that support sustained attention, teaching people to navigate multiple modes of meaning fluently, and recognising that human understanding has always been richer than any single medium could contain.

The future Marriott fears, where we’re all reduced to emotional, reactive creatures of the feed, is certainly one possibility. But it’s not inevitable. The teenagers I see who code while listening to philosophy podcasts, who annotate videos with critical commentary, who create elaborate multimedia presentations synthesising dozens of sources: they’re not the degraded shadows of their literate ancestors. They’re developing new forms of intellectual engagement that we’re only beginning to understand.

The question isn’t whether civilisation will survive the death of traditional literacy. It’s whether we’ll have the wisdom and imagination to build institutions, practices, and spaces that support human flourishing in an age where meaning moves through light and sound as readily as through ink. That’s the real work ahead, and it’s far more interesting than mourning a monopoly that was always going to end.

There’s a compromise between Marriott and the librarian. A minority of people will have the “wisdom and imagination” to be empowered by new mediums and not be “reduced to creatures of the feed”.

Maybe it’s not your fault or “moral failing” if you can’t focus when We have decided to outsource our principles to “what’s good for the market is Good”.*

* I’m not sure when this happened but here’s how I see it:

When I was a teen, the Jeff Lebowski played by David Huddleston’s character was the villain. Jeff Bridges’ Lebowski was the hero.

Your revolution is over, Mr. Lebowski. Condolences. The bums lost.

The dude extracts a mini-revenge when he tricks Brandt into giving him an expensive rug.

The spirit of today would be to lock the Dude up for pulling one over on a guy who turned out later to be an empty suit:

We did let him run one of the companies briefly, but he didn’t do very well at it…I give him a reasonable allowance. He has no money of his own. I know how he likes to present himself. Father’s weakness is vanity.

You don’t need to mainline kumbaya to notice how much rebellion-coded acceleration optimism is corporate-cuck fluffery.

Here’s a fun one:

There are only 2 possible reactions.

  1. You hate this interview
  2. You love this interview and hate yourself

I’m still stuck in the 90s, so you can guess where I live on this.

In honor of Jane Goodall, I’ll share a letter I saved in my notes years ago sharing her exhortation to make kids read:

Dear Children,

I want to share something with you — and that is how much I loved books when I was your age. Of course, back then there was no Internet, no television — we learned everything from printed books. We didn’t have much money when I was a child and I couldn’t afford new books, so most of what I read came from our library. But I also used to spend hours in a very small second hand book shop. The owner was an old man who never had time to arrange his books properly. They were piled everywhere and I would sit there, surrounded by all that information about everything imaginable. I would save up any money I got for my birthday or doing odd jobs so that I could buy one of those books. Of course, you can look up everything on the Internet now. But there is something very special about a book — the feel of it in your hands and the way it looks on the table by your bed, or nestled in with others in the bookcase.I loved to read in bed, and after I had to put the lights out I would read under the bedclothes with a torch, always hoping my mother would not come in and find out! I used to read curled up in front of the fire on a cold winter evening. And in the summer I would take my special books up my favorite tree in the garden. My Beech Tree. Up there I read stories of faraway places and I imagined I was there. I especially loved reading about Doctor Doolittle and how he learned to talk to animals. And I read about Tarzan of the Apes. And the more I read, the more I wanted to read.I was ten years old when I decided I would go to Africa when I grew up to live with animals and write books about them. And that is what I did, eventually. I lived with chimpanzees in Africa and I am still writing books about them and other animals. In fact, I love writing books as much as reading them — I hope you will enjoy reading some of the ones that I have written for you.

Money Angle

Below is an excerpt from the presentation I did at McCombs Business School at UT Austin.

It’s more hands-on to watch it after you take this quiz:

Confidence Test

(Respondents tend to score about 4 out of 10 on it.)

There’s a fun experiment in the video as well.

You’ll see just overconfidence and confirmation bias feed off each other in an escalating, reinforcing loop — and the key to stopping it.

Money Angle For Masochists

I was reviewing the posts I’ve written that have gotten the most views over the years. These 5 posts have had the longest tail, presumably because they are evergreen. They get readers every year.

  1. Straddles, Volatility, and Win Rates
  2. Lessons From The .50 Delta Option
  3. Moontower on Gamma
  4. If You Make Money Every Day, You’re Not Maximizing
  5. Understanding Edge

This is the most widely read and shared post I’ve ever written:

Why Investing Feels Like Astrology

As an fyi, all my finance articles are cross-posted on the moontower.ai blog so these URLs are the cross-posted ones. The originals are on the blog. Since a lot of my writing is educational, it doesn’t make sense to be in chronological blog format so while the blog is useful as a host, it’s better organized in this index.

Stay groovy

☮️

Moontower Weekly Recap

Posts:

my read on the market from the option lens

SP500 is up about ~33% since the April low.

To choose a different reference point, since the Feb high water marks that preceded Liberation Day, these indices have rallied:

SP500 ~10%

IWM ~ 8%

QQQ ~12%

SMH ~ 25%

A few single stock performances since Feb:

MSFT and GOOG ~+25%

AAPL ~+5%

META flattish

AMZN -5%

Just looking at these giant companies, there’s certainly dispersion under the hood of these indices. This is expected to continue if you believe the CBOE implied correlation index:

Despite the rally, and despite implied correlation getting smushed which usually coincides with SPX vols coming in hard, vols don’t seem especially low.

The x-axis here is IV percentile for 1-month vol (1-year lookback). SPY is around the 35th. Less than median, but I would have sold the piss out of that percentile if you asked me to guess it with stocks at all-time highs and implied corr in the trash. But it’s holding up well.

moonotwer.ai

Look at the names in that scatterplot. That’s my liquid ETFs watchlist.

The vols are actually pretty mid and not generally low. And those are all ETFs. In other words, baskets.

[When vols are low, those dots are all huddled to the upper left.]

But

if the corrs are very low,

and

the numerator of corr is index variance, which is mid,

and

the denominator is single stock variance

then, guess what?

Single stock vols are flying.

💡If you need a quick primer see Dispersion Trading for the Uninitiated

Vol manager Noel Smith and everyone in the options market is noticing:

https://x.com/NoelConvex/status/1975210329140613176

These are from Friday:

What’s driving all this?

Record call buying:

https://x.com/neilksethi/status/1973711812886515871

I asked Grok for recent tweets about the call option bonanza. You can see its response here.

We are in a stock up, vol up scenario in the single names. This hasn’t bled into index because the correlation transmission lines are still getting stuffed.

[QVR’s Benn Eifert explaining just 2 weeks ago how dispersion, a form of carry, is so crowded that the risk-reward favors doing something extremely rare for vol traders — getting long corr.]

While the index is not having a spot up/vol up moment the SPY/VXX 21-day rolling beta is the smallest its been in the past year (meaning vols are not falling very much on up days):

moontower.ai

I wrote this on X Monday:

Asset prices climbing a wall of worry — vols look broadly expensive compared to daily sampled vols. Guessing they look cheaper relative to weekly sampled since we’ve been trending

Shorting vol = long beta; tough diversification setup

I trimmed some hard deltas a month ago and trimmed also via soft deltas (buying puts in SMH)

Buying puts was the better play Why?

1-month puts for 28 vol correspond to a 1-month st dev of 28/sqrt(12) ~ 8%

We’ve moved 16% in the past month.

Another way to appreciate this is how a daily delta hedged position worked if you bought the 33d put back on 9/5 when I traded.

Image

OFC the unhedged put buy is a loser.

But if you trade options when you want to disentangle the vol vs directional contributions, after all you could have gotten the directional piece just buying the stock.

[Then I go on my soapbox a bit]

To use options directionally you need to think of the VOR…“value over replacement”

I could just trade the stock but all these salepeople trying to get me to use options. Is the lens they’re using focused on vol or hoping direction works out for you so they can elide what options are all about?

The market is buying calls. Soft deltas. It’s a fling, not a commitment. That’s the message I get when I see stock up/vol up, when I see relentless new highs with record call volumes. Very 2021 vibes but still acknowledging some discernment — after all, correlations are low.

How do I translate this into “so what’s the trade?”

First, notice that options as measured by VRP are very expensive. Here’s that liquid ETF list again on a scatterplot with VRP on the Y-axis (VRP is what % premium 1 month IV is to 1-month historical vol. The mean is a 40% premium. If you’re a moontower.ai sub (shameless plug but I hope you can see why our tool is called “opinionated”…we’re giving you the goggles here) looking at this stuff on a regular basis you know that premium is usually more like 15%.

Implied vols are pretty middish, certainly not low (ie they have room to fall) and they’re carrying like crap in the ETFs (which is why those dispersion traders are winning despite selling corrs low).

In fact, the X-axis represents the realized vol percentile, which shows that despite IV being moderate, the daily-sampled realized vols are at rock bottom.

Here’s how I describe the set-up:

  1. The destabilizing moves are higher. The market-maker and hedging community get shorter vol as we go up.
  2. Market-makers aren’t stupid. They literally saw this movie a few years ago and if you think SIG doesn’t have the “run Softbank vol surfaces” button in their cockpit, trained on the 2021 flow signatures, then you must also be puzzled as to why the market-makers are making unprecedented piles of cash trading against retail with their democratized access and fancy subscriptions. My guess, those single stock calls are rich enough to neutralize the gamma poison on the arrows being flung at them.
  3. They also aren’t in the business of selling vol naked. So if they’re not buying index vols to hedge the short upside vols, they must be buying ATM or downside. This position “decays long” (instead of doing vanna gymnasitics, think of it this way — if all the extrinsic value of their short calls and long puts disappeared their remaining position would just be long stock. The delta hedge.) As long as the rips higher don’t outperform the jacked upside vols they are selling, the market rally works for them.
  4. The market’s conviction is softening because length is being added in a hedged way (ie call buying instead of stock buying).

The tingling this set-up gives me:

A month ago SMH vols looked relatively cheap, leading me to trim with soft deltas (ie buying puts).

[Let me express this in different but equivalent terms — staying net long but buying puts is the equivalent to stock-replacing into synthetic calls. Of course, being a net seller of deltas on a rebalance, I lost to trimming deltas despite being right on vol. The trim was expressed in the right way, while the decision to trim was bad. What do you want from a vol trader?]

Now I think the vols are expensive and a move lower is stabilizing. So my vol axe would be to want to sell downside options (ie puts) which I think will underperform if we retrace lower because vol is already moderate and put skew adds a premium on top of that.

Like I said, the market makers aren’t stupid. They probably own downside to hedge their short upside vega which means the put skew is likely already low enough to make this position giant hedged risk-reversal they likely have on make sense.

And that’s the key.

If you want to bet on a retrace:

  • you want to buy ATM/.25d put spreads where the put skew is NOT cheap.
  • Likewise, you may want to buy put calendar spreads where the term structure is relatively flat if the market-makers are indeed well-supplied with puts as calendar spreads would benefit from a “stabilizing” grind down and a fat VRP.

Both of these trades are short delta (although being long a put calendar spread, you can flip to a long delta if the market crashes…still the most you can lose is your option premium if you don’t hedge)

Unfortunately for me…SMH put skew is trashed in the 1-month option. The surface can read my mind.

(It’s joyless to report that surfaces front-running my thinking is the reward for experience. That’s what you get for skill-building in an adversarial, red queen career)

On a more uplifiting note, if you poke around you can find put skews that are indeed elevated. In fact, if you have a cross-sectional lens, you can always sort names into relative highs and lows across all kinds of dimensions to see what’s typical and what sticks out, so you can express your view by finding the cheapest expression surfaces offer.

A few extra thoughts to ponder

  1. You can sell VIX futures as a way to sell put skew and vol all at once since the pricing is highly sensitive to put prices. But just to practice thinking about all these triangle relationships, remember that selling SPX index vol while capturing a fat VRP right now is also selling index vol very cheap relative to stock vols. That concept is portrayed by the low implied correlation levels.
  2. SPY put skew is a bit higher than normal. Given the moderate levels of vol, it is totally possible that while retail is buying single-name calls, institutions are buying puts to lock in gains at the index level. If the market turns lower and investors are hedged, this supports the idea that downside moves will be orderly (assuming the downside move isn’t triggered by some insane shock — it’s gonna be exhausting if I need to slap pandemic disclaimers on market comments).
  3. Putting the pieces together, I’d guess large vol traders have a giant dispersion riskie on…short downside corrs, long upside corrs. Which is probably a bit structural for them, with the limiting reagent in the construction being single-stock option liquidity.

Do my wife and I have separate accounts and other personal money questions

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

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

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

Do we have a prenup?

Nope.

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

Do we have separate accounts?

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

Which brings me to…

Do we have a budget?

Wellllll…it’s more like guidelines.

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

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

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

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

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

Who manages our investment portfolio?

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

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

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

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

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

Who is more spendy?

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

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

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

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

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

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

Microcosm of marriage

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

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

 

16 years from this day…

I get this…

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

 

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

exchange student week

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

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

Here’s how it works:

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

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

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

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

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

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

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

Moontower #287

Friends,

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

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

You will recall a March issue titled Moontower Unite:

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

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

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

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

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

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

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

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

And you did.

Exchange Students

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

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

Here’s how it works:

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

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

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

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

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

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

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

Money Angle

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

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

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

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

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

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

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

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

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

Money Angle For Masochists

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

Just one brief comment from me:

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

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

From My Actual Life

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

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

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

Do we have a prenup?

Nope.

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

Do we have separate accounts?

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

Which brings me to…

Do we have a budget?

Wellllll…it’s more like guidelines.

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

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

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

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

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

Who manages our investment portfolio?

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

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

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

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

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

Who is more spendy?

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

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

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

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

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

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

Microcosm of marriage

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

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

 

16 years from this day…

I get this…

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

 

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

 

Stay groovy

☮️

Moontower Weekly Recap

Posts:

the easiest win in options is for stock traders

Most people who get into options are seduced by levered returns, but for the relationship to go from a fling to the real thing, they commit to learning about “vol”: implied vol, realized vol, vol surfaces. I’ve declared that options are ALWAYS about vol.

This is snobbery to the same degree as reserving “champagne” for sparkling wine that originates from a particular region of France. I resort to such snobbery on options to make the distinction between an option trade working for directional reasons vs vol reasons (if it works for the former and not the latter you were probably better to just trade the stock). But as all strong pronouncements go, they obscure truth. Sometimes to deceive, but other times, like in my example, it’s to move the emphasis to what matters without heat loss from caveats and equivocations.

In this post, we discuss the full truth. Options are always about vol unless they are about funding.

Funding is boring, bean-counting stuff. We want sexy. Think about it — what do you hear more about, rho or vanna? The opposite of love is not hate, it’s apathy. I get it, so many things vying for our attention, the investor neglect of “cost of carry” seems like a weird thing to wear a ribbon for — except for the fact that understanding cost of carry is both the easiest and most widely applicable “win-win” in the options world. Its neglect is quite tragic.

We will fix this over the next 2 posts. These are foundational posts that might well represent the largest gap between what people know and what they should know. It’s the basic blocking and tackling of options that every professional training program starts with whether you are going near options as a trader, quant, stock loan, ops or broker.

I’ll add that given the rise of heavily borrowed, speculative “meme” stocks, in a landscape where interest rates are not pinned to zero, this topic has never been so timely.

Today, we:

  1. Start with a puzzle
  2. Show how the solution informs arbitrage theory

Next week, we go from theory to practice:

  1. We’ll show just how much money you could be leaving on the table in both longs or shorts by not letting the options market finance your position. This is relevant to any investor.
  2. For those who are more vol-inclined we see how this work forms the foundation of modeling option surfaces. We’ll conclude with related considerations that are out of scope.

Onwards…

A market puzzle

You notice the following market prices:

Stock price: $100

1-year 100 strike call: $8.00

1-year 100 strike put: $7.00

The risk-free rate proxied by SOFR: 4% (assume this stays constant)

Dividends: $0…the company is not expected to pay a dividend

Your objective: Capture the return of owning the stock for the next year. Ignore taxes.

What’s the best way to do this assuming God confirmed the SOFR and dividend assumptions?

The first things that come to mind:

1) buy calls

Owning the return of a stock looks like a straight line. If the stock goes up 5%, you make 5% and vice versa. We know that outright option position payoffs look like hockey stick diagrams. If you buy the call and the stock only goes up 4% over the course of the year, you lose 50% of your premium vs earning 4% on your invested capital. Rule this out.

2) buy the stock

This works. It answers the question faithfully.

But there’s a problem.

This is exactly the answer an investor who doesn’t understand options would choose.

It turns out this investor is about to:

a) underperform someone who understands options. If this is a professional investor who has a zero-sum mandate of “get that alpha” will soon find themselves with no mandate

or

b) lose money

Countless investors who do not understand options make the mistake of buying a stock when they should have ordered off-menu— they should have bought synthetic stock.

To understand why, we start by breaking down why buying the stock in this setup is either a recipe for underperformance or worse, a losing proposition.

The problem with just buying the stock

The “underperformance” case

First, even if you don’t care about relative performance (an acceptable and even healthy posture for retail or non-professional investors), this is still important because “you could have done better” with this knowledge.

This is not something that you only learn in hindsight. Before doing the trade you can know if buying the stock is inferior!

Inferior to what?

Buying the synthetic future via options!

💡A synthetic future involves buying the call and selling the put on the same strike. Old school traders also call this a “combo”. The easiest way to see this is to just consider the scenarios. Suppose you bought the 100 call and shorted the 100 put. If the stock expires greater than $100, you will exercise and buy the stock for $100. If the stock expires below $100, your short put will be assigned and you will be forced to buy the stock for $100. Either way you are buying the stock for $100. If at some point in the future you are guaranteed to buy the stock for $100, then you are long that exposure right now that moves dollar for dollar with the stock. This video explains it with live data. This video is an ELI5 approach.

In the puzzle, the synthetic future is cheaper than its fair value. Or you can say the stock price is overpriced relative to its synthetic future.

To understand why, we can use our puzzle to step through the cash flows. The logic of the cash flows bridges the theoretical fair value of the synthetic future to the stock price.

Suppose the stock goes up 10% in a year. The “normie” investor who bought the stock makes $10. But what about the option-pilled investor who bought the 1-year synthetic future instead?

The option-pilled investor spends $1 today buying the 100-strike synthetic. They spent $8 on the call but collected $7 for the put. At expiry, the stock is $110 so the 100 call is worth $10 and the put is $0. The position they spent $1 for is worth $10. The total profit is $9 while the regular investor made $10.

The option-pilled investor made $1 less than the stock investor for an equivalent exposure. This makes sense — if you pay $1 for 100-strike combo you have synthetically paid $101 for the stock not $100.

But what are we ignoring?

I’ll start with a hint. This is not a percent return thing. Someone is jumping up and down that you 10x your money with the options. But that’s not fair. To honestly compare returns you also need to fairly compare risk so even though you only laid out $1 you still needed to keep the rest of the cash in reserve in case of margin calls. After all, you are still long $100 worth of stock.

Hopefully, the hint was actually a hint and not just a clarification.

The option-pilled investor acquires the same exposure for $1, but while they must keep the other $99 in a margin account, they do earn interest on that. In 1 year, they make $9 on the shares + $3.96 in interest ($99 * 4%) for a total profit of $12.96 instead of just $10.

Towards theory

We used a simple investing example to demonstrate how the same exposure expressed in 2 different ways led to 2 different cash flows. And one of them simply dominates the other. This is not a “frontier” thing where the p/l is different but the trade-offs varied. This is arbitrage. If the same exposure yields 2 different profits with the same risk then one set of cash flows is mispriced today.

You could buy the synthetic future and short the stock and earn ~$3 (about $4 in interest minus $1 premium for the synthetic future)

Again, somebody reading this is jumping up and down:

“Who cares about earning 3% when SOFR is 4%?”

I didn’t say 3%. I said $3. You can do this with no starting capital in theory. You borrow shares, short them, and collect $100 in the account today. We’ll be conservative and say the collateral you hold against the short is half the proceeds of the short (you still earn interest on collateral) and you spend $1 of the proceeds on the synthetic future while earning $3.96 in interest (4% on $99) for a total profit of $2.96.

You made $2.96 on zero starting capital. Infinite return. Pure arbitrage.

While markets are not perfectly efficient, if you can use a calculator, you can be sure Ken Griffin can too. With almost $3 extra dollars sitting on the sidewalk, the synthetic is too cheap at $1. Ken is going to bid the synthetic higher until he is indifferent between owning the combo vs the stock. As you might guess, that price, the non-arbitrage fair price, must be closer to ~$4.

Assuming we are indifferent or “risk-neutral” between 2 cash flows, the present value of those cash flows must trade for the same price today in a world where Ken Griffins hunt for free-money glitches 24/7. This is derivatives and arbitrage-pricing theory in a sentence.

We must turn this logic into a formula.

  • When we buy the synthetic future, we commit to buying the stock for $100 in 1 year.
  • With a choice between that commitment vs buying the stock today for $100 we prefer the synthetic because we have the same exposure but only need to set aside the present value of the $100 we need to buy the stock in 1 year.

The difference between the 100 strike and the present value of the strike is the cost of carry. The buyer of the synthetic must pay the carry today to be indifferent between buying the stock or the future.

This leads to 2 important formulas.

“Reversal/Conversion”

The cost of carry is referred to as the “reversal/conversion”. That’s a mouthful, so it’s often shortened to “rev/con”.

R/C = Cost of carry = K - Ke⁻ʳᵗ

where:

K = strike
r = risk-free rate
t = fraction of a year

Using our example:

K = 100
r = .04
t = 1.0

The origin of the term reversal/conversion is worth a mention.

It is actually a quoted value in the broker market as it acts like an EFP or ‘exchange for physical’.

  • If you “reverse”, you are doing a package of buying a synthetic future and selling or shorting the underlying stock in equal proportion net of the multiplier (ie for every synthetic you buy, you short 100 shares). In this example, the fair price to pay for the reversal is $3.92. If you are long shares and want to flip into synthetic futures instead you should have to pay $3.92.
  • You can also “convert”. If instead you were short shares and wanted to sell the synthetic and buy the stock to exchange your short from physical to options then you should require a payment of $3.92 to be kept whole on the fact that you need to wait a year to receive $100 for selling the stock at expiry. The conversion package is “short the synthetic future, buy the stock”.

The cost of carry or “rev/con” looks similar to the interest on a zero-coupon bond with a face value of the strike.

💡For this post, we are limiting the discussion to European-style options that do not pay dividends…the same type of options the original Black-Scholes equations were derived for.

Fair value of the synthetic future

The buyer of the synthetic must pay cost of carry of the strike up front for there to be no arbitrage between this otherwise costless position as compared to buying the stock.

They should also have to pay the intrinsic value or difference between the stock price and strike price. In this example, if the stock is $100 the 100-strike synthetic future costs $3.92. But what about the 99-strike synthetic future?

The commitment to buy the stock is already $1 in-the-money and you must pay the present value of $99 to account for the carry on the strike.

Synthetic future = Intrinsic + R/C

Synthetic future = (S-K) + R/C

Bonus: Put/Call parity from the fair value of the synthetic future

💡For the algebraically inclined, you can see how this re-arranges to the formal put-call parity formula. Remember the synthetic future involves buying a call and selling a put on the same strike: C-P

Synthetic future = Intrinsic + R/C

C - P = (S-K) + R/C

C = (S-K) + P + R/C

In words,

Call = Intrinsic + Put + cost of carry

All the heuristics are right in the identity:

  • The call includes the value of the put on the same strike
  • An option must include intrinsic
  • The call saves you from funding the stock today so the cost of carry must be added to its value to prevent arbitrage. If interest rates rise, call values increase as the value of not having to spend the cash today is higher!

Re-arrange for the put:

P = (K-S) + C - R/C

In words,

Put = Intrinsic + Call – cost of carry

  • The put includes the value of the call on the same strike
  • An option must include intrinsic
  • Being short via a put option doesn’t give you interest on the proceeds of cash from the short, so the put must be discounted by the cost of carry to prevent arbitrage. If interest rates rise, put values fall as there is more interest to be earned from being short actual shares.

Circling back to the problem with buying the stock

In our puzzle, we contrived a situation where the synthetic was offered too cheap relative to the stock price, assuming God decreed that SOFR is 4%.

We derived the no-arbitrage price for the synthetic by finding our indifference point between the cash flows of owning the stock or the synthetic.

In practice, if the synthetic appears too cheap compared to a SOFR rate, I can assure you there’s no free money on the sidewalk. You should check your assumptions. I’ll check for you — the market is saying you can’t collect SOFR on the proceeds of these short shares. In fact, if the synthetic is extremely cheap relative to the stock price and you try to pick up the free money by buying the synthetic and shorting the shares (that “reversal” trade we talked about), you might find that instead of paying for the package, the market pays you! In other words, the reversal is trading for a credit (the synthetic future is trading cheaper than the stock price). You think you should be delighted…until your broker sends a bill for borrowing the share you shorted instead of you receiving interest on cash proceeds in the account.

If you were bullish on the stock as we stipulated in the puzzle and bought it, you just bought shares in something heavily shorted. Instead, you should have bought the synthetic future for a lower price. If you are bullish and going to get long the stock wouldn’t you rather at least buy it for the lowest price available? That price will be in the options market via synthetics — not the stock market. That’s why I say that even stock traders, ones who don’t care about vol, still need to understand options. You incinerate money buying the stock when you should have just bought the synthetic. “Not incinerating money” is the easiest win in investing.

Next week:

  • short stock rebate
  • learn to measure the term structure of synthetic stock futures, effectively creating a menu of stock prices at any point in time according to the funding rates until each expiration. This offers another easy win — it’s an option to refinance our positions when the market pricing differs from our prime broker (rare example of a win-win where pros even trade with each other via rev/cons or box trades)
  • understand how funding and put/call parity sit at the foundation of surface modeling

Appendix: Dividends and Rev/Con Markets

So far, we assumed no dividends. Real stocks usually pay them, and this changes the fair value of the synthetic future.

where:

q = continuous dividend yield

Dividends lower the forward price because the holder of the synthetic future doesn’t collect them.

2. Intuition

  • If dividends = 0, this collapses to the formulas in the main text.
  • If dividends are high, the synthetic trades cheaper relative to spot, because you’re forgoing dividend income by not owning the physical shares
  • If dividends exceed interest rates, the forward price can even trade below spot

3. Example with dividends
Suppose:

  • Spot stock price = $100
  • Risk-free rate = 4%
  • Dividend yield = 2%
  • Time horizon = 1 year

Then:

The implied future is $101.98

Without dividends, the implied future would have been $103.92 . The 2% yield shaved nearly $2 off the forward price.

You can adjust this formula for discrete dividends by deducting the present value of each expected dividend from the strike.

You can see that if the risk-free rate is 0, the R/C is negative or “trades for a credit”. In this case, you would pay to “convert” since being long the stock pays you the dividend. You would need to be paid to “reverse” as you forgo the dividend being long the synthetic future instead of physical shares.

Rev/cons are heavily traded as the funding market through the options can be much tighter than prime broker rates. It’s also a transparent market, whereas stock loan can be opaque beyond your prime broker.

Rev/con markets are the home for price discovery on expected dividends. If you had a divergent view from the market on a future dividend, this is where you go to pick someone off. Rev/cons are clean trades because they have 0 delta (you are offsetting a synthetic future vs shares as a single package — or you can say that you are trading the synthetic future delta neutral. They have no market impact and can often trade in size so for those services that try to tabulate volume to say what market makers are holding rev/cons are a nuisance. If they fail to notice that the option trades are matched with a corresponding stock print, they will attribute greeks when they shouldn’t.

🔗Further reading

Ari wrote You Don’t Use Your Instagram Self to Trade which is a great demonstration of how tricky the details can be. He also uses an equivalent but different representation of the put/call parity equation. I think of his version as combining cost of carry and intrinsic terms to become “intrinsic to the discounted strike”.

Insider selling that’s…bullish?

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

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

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

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

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

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

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

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

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

For a frame of reference:

ASTS is about a 100 vol name.

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

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

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reality is more than memes

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

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

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

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

He’s not a god.

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

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

Wait, what?!

The imbalance is breathtaking.

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

r/MovieDetails - a collage of Valerie Perrine standing in front of a map
I mean are you even a supervillain if you don’t have a resort named after your gal’s boobs (screencaps via Reddit)

You have to laugh.

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

(Ok, calm down)

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

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

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

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

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

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

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

“Reality is messy” 4th grader edition

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

Image

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

Here’s the backstory:

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

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

So what happened?

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

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

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

Did the teacher notice this increase in the money supply?

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

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

Almost certainly.

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

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

1) Address Max’s sense of justice

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

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

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

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

2) Diagnose the situation

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

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

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

3) Give the market what it needs — stuff

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

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

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

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

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

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

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

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

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

Even Superman was conflicted.

Moontower #286

Friends,

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

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

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

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

He’s not a god.

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

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

Wait, what?!

The imbalance is breathtaking.

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

r/MovieDetails - a collage of Valerie Perrine standing in front of a map
I mean are you even a supervillain if you don’t have a resort named after your gal’s boobs (screencaps via Reddit)

You have to laugh.

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

(Ok, calm down)

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

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

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

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

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

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

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

Money Angle

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

Image

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

Here’s the backstory:

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

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

So what happened?

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

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

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

Did the teacher notice this increase in the money supply?

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

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

Almost certainly.

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

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

1) Address Max’s sense of justice

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

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

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

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

2) Diagnose the situation

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

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

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

3) Give the market what it needs — stuff

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

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

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

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

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

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

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

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

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

Even Superman was conflicted.

Money Angle For Masochists

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

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

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

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

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

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

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

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

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

For a frame of reference:

ASTS is about a 100 vol name.

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

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

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Stay groovy

☮️

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