Friends,
The following statements are simultaneously true:
1) You can do anything if you put your mind to it” is a lie.
If your last name is McCaffery, you have a chance of engineering elite athletes. If you are an Abdelmessih, you’ll be waiting for the metaverse for the sensation of what a 4.3 40 feels like.
2) You are currently very far from your ceiling.
You can drive a truck through the gap between these 2 ideas so they are not really in conflict.
To let the first disappoint you is to let perfection thwart the good. The cost of this pedantically true statement is self-defeat. It’s the kind of victory only an intellectual would recognize because it’s familiar territory — an unnatural use of technicalities to excuse failure because they define success as adherence to fine print. It’s a strange inversion of “It’s better to be roughly right than precisely wrong”. They are precisely right but roughly wrong, but the wrongness touches their life ceaselessly and in the most material ways.
To let the second statement disappoint you is known as a “start”. Congratulations. Recognition is the first step. This should be obvious, but the path to improvement starts by realizing there’s room for it. In you. Not in the world changing such that your conditions are improved, but for you to improve your station, with a smiling indifference to a world you can’t control anyway.
But I stay “start” because beginnings are sensitive to expectations. If you start anything expecting it to be easy, you will likely not finish. It’s such a simple observation, but it bears a life-changing load. It means that anything you are serious about doing should start with the expectation that it will test your resolve, so when the moment comes, you are not hit with the double indignity of difficulty but also surprise.
And one of those negative surprises always comes from others. Haters. But haters also come from people who don’t actually hate you. They may even love you. But this is how they deal with being disappointed in themselves.
This is not an easy subject. It’s at the root of how everyone relates to everyone else. It’s wrapped up in status, luck, a sense of narrow justice when it has to do with the promotion at work, and global justice in the sense of being born on third (or America…although whether the runner is heading home or to second is today’s “dress” debate).
It’s not as easy as saying “ignore everyone else”. There’s a scammer in jail or even just a common internet grifter who dismissed sober advice from someone they respect who they dismissed as speaking behind a veil of risk-aversion. Or less scandalous scenarios like “I’m dropping out of school to pursue acting”.
It’s a good idea to consider the judgement of those you are certain love you. But even then you need to grade them on a curve based on their own risk bias which takes some judgement of your own. Parents want to see their adult children on solid ground. If you win an Oscar and they get to walk the red carpet, that’s just gravy. That will never be in their calculus. But it might be in yours. They’re running a max-min strategy, you want to win the tournament.
(Rob Carver’s analogy to the Wordle starting word choice is a tangible expression of this for most of the English-speaking world who got swept up in that game.)
So if you should consider the judgment of loved ones and even then with skepticism, you know who you should definitely ignore? Randos and water-cooler friends. There’s just too much at stake.
I posted this on X in a thread where Ryan was parrying haters.
When it comes to haters its useful to remember that the correct retaliation is nothing but apathy which if the detractor was smart in the first place, they would realize that themselves. What’s that line about hate being like drinking poison and expecting the other person to die?
Hate seems like ultimate confession of weakness.
It’s very rare that anyone changes anyone else’s mind. Unlearning hurts.
The internet fools us because when life’s most important moments happen, your world shrinks. The volume on everything turns down, and you are left with a few people. The hater? Might as well be an atom in another galaxy. Why would they occur to you?
Attention is everything. Lots of people on here give you the gift of permitting yourself to ignore them. Accept it gratefully
Scott Adams, the Dilbert cartoonist, died this week after a battle with prostate cancer. He’s a politicized figure (Scott Alexander’s memorial post is a bizarre mix of tribute and psychoanalysis). But like many others, I’ve read his work on career advice and even the thought experiment book “God’s Debris” which I remember precisely nothing about. But I did see a quote from it this week, which I strongly agree with:
“People think they follow advice but they don’t. Humans are only capable of receiving information. They create their own advice. If you seek to influence someone, don’t waste time giving advice. You can change only what people know, not what they do.”
Money Angle
I want to expand briefly on Wednesday’s HOOD: A Case Study in “Renting the Straddle” because HOOD’s implied volatility that contains earnings actually declined for the rest of the week and disentangling that is a good chance to reinforce your understanding.
On Wednesday, Feb 13th HOOD vol (which encompasses earnings on Feb 10) lifted a bit from when I wrote the post. We’ll call it 68% IV.
To make 68% IV fit smoothly with the non-earnings vols from the preceding expirations, we need to assume an earnings move that allow the ex-earnings vol to be ~56%
That corresponds to about a 9.5% earnings move (a bit higher than the average move of 8.55% for the past 8 quarters).
This table shows implied trading day IVs net of various-sized expected earnings moves.
Let’s tie this idea back to theta or option time decay.
A one-day move of 9.5% corresponds to a single-day implied vol of ~119%
9.5% / .80 = 119%
This comes from remembering that an ATM straddle is 80% of the implied volAs you approach the earnings day, the implied vol of the option will be dominated by the fact that the stock is expected to move 9.5%. Therefore, we know the implied vol is going to increase.
We think of theta as “how much value the option loses as time passes” but because we know that vol is going to steadily rise, we can conclude that the actual experience of theta is going to be much less than the model says. The model doesn’t “know” the implied vol is going to increase, but you do.
As vol increases, the option will gain value that offsets some of the theta. It won’t offset all the theta. If it did, then you would just buy all the options today, have free gamma for a month, and sell them right before earnings.
So much of the theta will be offset?
We can answer this if we hold our assumptions constant:
- trading day IV is 56%
- earnings move is 9.5%
(I added the assumption that the earnings date is also the expiration date. It’s stark that all the theta we defer happens on the last day.
You can see how the vega offsets part of the theta.
Just like with any option, the theta still accelerates as you approach expiry but at a slow rate (theta is left axis).
All the theta happens at the end.
Oh, as a matter of pragmatism, I should add that HOOD option markets are wide. And yet there’s millions of contracts of open interest! Amazing for market makers. To quote Alanis…isn’t that ironic?
Money Angle For Masochists
In Thursday’s paid subs post, embedding spot-vol correlation in option deltas, I buried this story but I thought worth sharing since it’s broadly suggestive of what happens when you list options on an investments touted as worth being in your asset allocation:
I started in commodity options just before the listing of electronic options markets. When I first stepped into the trading ring, many market-makers were still using paper sheets. We had spreadsheets on a tablet computer, but heard of a fledgling software called Whentech. Its founder, Dave Wender, was an options trader who saw the opportunity. I demo’d the product, and despite it being a glorified spreadsheet, it centralized a lot of busy work. It had an extensive library of option models and it was integrated with the exchange’s security master so its “sheets” were customized to the asset you wanted to trade.
I started using it right away. Since it was a small company, I was able to have lots of access to Dave with whom I’ve remained friends. I even helped with some of their calculations (weighted gamma was my most important contribution). I was a customer up until I left full-time trading. [Dave sold the company to the ICE in the early 2010s. It’s been called ICE Option Analytics or IOA for over a decade.]
The product evolved closely with the markets themselves. Its nomenclature even became the lingua franca of the floor. Everyone would refer to the daily implied move as a “breakeven” or the amount you needed the futures to move to breakeven on your gamma (most market-makers were long gamma). Breakeven was a field in the option model. Ari Pine’s twitter name is a callback to those days. Commodity traders didn’t even speak in terms of vols. They spoke of breakevens expanding and contracting.
What does this history have to do with a spot-vol correlation parameter?
This period of time, mid-aughts, was special in the oil markets. It was the decade of China’s hypergrowth. The commodity super-cycle. Exxon becoming the largest company in the world. (Today, energy’s share of the SPY is a tiny fraction of what it was 20 years ago.)
Oil options were booming along with open interest in “paper barrels” as Goldman carried on about commodities as an asset class. But what comes with financialization and passive investing?
Option selling. Especially calls.
Absent any political turmoil, resting call offers piled on the order books, vol coming in on every uptick as the futures climbed higher throughout the decade.
A little option theory goes a long way. Holding time and vol constant, what determines the price of an ATM straddle?
The underlying price itself: S
straddle = .8 * S *σ√TIf the market rallies 1%, you expect the straddle price at the new ATM strike to be 1% higher than the ATM straddle when the futures were lower. Since the “breakeven” is just the straddle / 16, you expect the breakeven to also expand by 1%.
But that’s not what was happening.
The breakevens would stay roughly the same as the market moved up and down.
If the breakevens stay the same, that means if the futures go up 1%, then the vol must be falling by 1% (ie 30 vol falling to 29.7 vol)
It dawned us. Our deltas are wrong.
If we are long vol, we need to be net long delta to actually be flat.
When your risk manager says why are you long delta and you explain “I need to lean long” to actually be flat, you can imagine the next question:
“Ok then, how many futures do you need to be extra long for this fudge factor?”
We need to bake this directly into the model because it’s getting hard to keep track of. Every asset and even every expiry within each asset seems to have different sensitivities between vol and spot. The risk report can’t be covered in asterisks detailing thumb-in-the-air trader leans.
Whentech listened. Whentech introduced a new skew model that allowed traders to specify a slope parameter that dictated the path of ATM IV. Their approach was simple and numerical…
From My Actual Life
I definitely have more couch potato tendencies in the winter. I’m currently watching Mad Men (for the first time!) I’m almost finished with Season 2 which means I like it.
I recommend the movie Eden on Netflix. Go into it knowing nothing. That’s how I went in (Yinh said let’s watch some movie called Eden and I said ok knowing nothing else). I’m so out of touch sometimes, we were a quarter of the way through the movie before I said “Isn’t that Jude Law?”
It’s definitiely one of those movies where right after you finish it, you’re googling “how true were the events in [movie title]?”
Wednesday night was the first time I ever went to a Cal game which is kinda pathetic since I’ve lived less than 20 minutes from Berkeley for over a decade now. But St. Mary’s College usually has a better hoops team, is even closer, and has a much smaller arena. It’s more of a gym than a venue.
Cal was able to hang with the Blue Devils for the first half before Duke started being Duke.
So many nepo babies in the game. Marbury’s son was is a sophomore walk-on for Cal (he’s only played 5 minutes all season though), Justin Pippen is Cal’s starting PG as a sophomore, and the freshman Boozer twins play for Duke (although only the 6’9” one sees the court. 6’4” bro MIA). The taller Boozer is a force. Much savvier than you might expect from a freshman big.
Duke brought out some local celebs. We didn’t see them, but Steph and Del Curry were there with family. We did see these guys one of whom’s life is basically a victory lap. Getting dapped up every 3 seconds, everyone taking selfies with him. You can decide who I’m talking about:
Stay groovy
☮️
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