In this issue:
- obvious error rule
- broken window theory
- why home prices aren’t going to crash
- put options on CAR
Friends,
From @buccocapital on Anthropic CEO’s insistence that AI is going to wipe out 50% of jobs.
Bingo.
The “we gave you our data and you used used it take our livelihoods” hasn’t even become a broad movement yet. The limit of the movement would be “Sorry, but this thing you built belongs to all of us in the same sense as a national park,” and the rolling protests from industry to industry as they get wiped will be sure to inform the politicians of their preferences.
The caricature black-and-white thinker’s retort is “Well, that’s how the cookie crumbles.” But even stock exchanges, bastions of capitalism, have “obvious error rules” that use a mix of guidelines and metrics to deem certain trades as clearly erroneous, not what any reasonable trader could have intended, or just out of bounds. They have the discretion and authority to bust or adjust such trades.
A view from the comments:
If Dario is right, society is gonna invoke an “obvious error”. That’s nice that you nerds figured all this out, but your optimization function didn’t know how to count human flourishing, and as far as we can tell, there’s a bunch of you who don’t even consider this a goal. It’s also creepy that you wouldn’t hide that. A gangster surprise strangles you from behind while you’re in the front seat. A supervillain tells you their whole plan to your face before they push the button.
You’ve probably seen this floating around. Extinctionists? Good grief, look who these people are:
So does Dario even want to be right about 50% of people losing their jobs? If he’s wrong, he’ll have to just live with being a regular old billionaire. I don’t know if that’s enough for him. If he is sounding the alarm on the risk and not just pumping Anthropic’s products, then he actually is being a virtuous Cassandra and maybe he just sees himself on a runaway train of prisoner’s dilemma defection.
If he thinks he can thread the needle and have everything he wants, well, I guess he’s no different than any loud mega titans these days.
broken window theory
At least once a day, I think about how the staunchest supporters of “broken window theory” must think it only applies to blue-collar crime.
Visible law and order gets our attention, while real power funneled through shell companies and senators’ pens is hard to trace. These are old themes often set to music and poetry by Dylan, Marley, Cash, Springsteen, Queensryche (sorry, I had to slip in my personal choice — the Operation Mindcrime album).
But what’s jarring is that…well, it’s not even hard to trace.
Or what about futures markets? Those centralized exchanges have lot level surveillance of every trade. Maybe they’re afraid to open their eyes because it’s right in front of them.
Talking to friends running commodity books and the blatant abuse of futures before the Truth Social announcements is just a joke at this point. Traders are piggy-backing too but it feels like blood money. You’re sad to make it, but also your job is to make money come out of the computer.
It’s easy to rationalize that this is not blood money anyway. You’re not the source of the corruption. You’re a distant observer drafting on it, but you know you’re not in control. You could become collateral damage of the next manipulation. It’s almost like you better make money when you’re seeing the ball because you’re aware you could be on the wrong end of a random whim.
More and more, I think the left/right polarization is just bread and circuses to distract us from an Epstein class vs everyone else. Power haves and have-nots. That there happen to be deep ideologues from both red and blue varieties is pure convenience for the puppeteer. A believer without any real power is just a pawn.
Don’t let the words distract you from the actions. Via ABC reporting…
Words:
Trump was asked on Thursday if he was concerned about online prediction markets, through which bets are regularly placed on geopolitical events, such as the war in Iran, and the potential for insider trading.
“Well, you know, the whole world, unfortunately, has become somewhat of a casino,” Trump responded. “And you look at what’s going on all over the world, in Europe and every place, they’re doing these betting things. I was never much in favor of it. I don’t like it conceptually, but it is what it is.”
“But they have all these different sites. They have predictive markets. It’s a crazy world. It’s a much different world than it was.”
Actions:
One of Trump’s namesake companies, Trump Media and Technology Group, announced last year that it would launch a prediction betting marketplace called Truth Predict. The White House has said all of President Trump’s assets, including his majority stake in Trump Media and Technology Group, are being held in a trust controlled by his sons.
Polymarket has cultivated close ties to the Trump family, announcing last August that the president’s son, Donald Trump Jr., would join its advisory board. Trump Jr.’s venture capital firm, 1789 Capital, also invested in Polymarket.
Maybe owning stakes in prediction markets is just Trump hedging his lament that the world is now a casino. Great emotional awareness, I guess?
Look, if politics are your personality and you’re not manipulating them for profit, you are a sucker. If you are, you’re something else. But it’s not a sucker.
Which leaves a rhetorical question for you to ponder…what’s worse than being a sucker?
Money Angle
🔗 Why Home Prices Won’t Crash: The Truth About Wall Street | 6 min read
Daryl Fairweather, Redfin’s chief economist, explains that the housing market “is really weak”, but why she doesn’t expect prices to fall. She does expect housing to be dead money for the next decade. They have been dead money in my area since the dust settled after the spike in mortgage rates in 2022.
She explains how both supply and demand pictures shape her story, as well as the large role of trapped equity. I’ve explained the math of this in depth in if you have a low rate mortgage, you incinerate money when you sell.
@rabbijacob16 sent me the thing I’ve been saying someone should build:
a searchable archive of Matt Levine’s Money Stuff column that automatically updates, organizes by theme, and even generates blog posts.
Money Angle for Masochists
Remember that chart of CAR last week.
(Matt Levine wrote about the fundamentals of the squeeze on 4/15)
So this was Thursday:
Also, note that the change in the basis per expiry increased beyond October, meaning the implied carry cost is no longer negative.
When a stock is hard-to-borrow, its options will imply a future price below the spot price, since a market-maker that is getting saddled with long calls, and short puts from the flow must short shares to hedge. The cost to borrow those shares is reflected in the synthetic futures (ie the option combo of long call/short put on the same strike).
The carry rate increased on Thursday, which means puts fell relative to calls on the same strike, as presumably the borrow will loosen as the squeeze subsides. This was another headwind for people who bought downside puts to bet on CAR coming back to earth. Far OTM December puts, like the 70 strike, actually declined in value on the sell-off. A classic example of what I call positive delta puts.
Options Education in 90 Minutes
I joined a private chat with experienced traders, although not necessarily option traders. They were all very welcoming and several of them made sure to tell me that this video was formative in helping them learn about options:
I looked it up and noticed it’s approaching 10k views which isn’t much in any grand sense, but it is by far my most watched YT vid. I read the comments and even they are extremely nice so yea just throwing it out there that a bunch of nerds thought is was helpful and material that is very hard to come across online.
There’s a lot of blocking and tackling in it, but as I re-skimmed it, the part that I think is most interesting is the “dissection” stuff towards the end. I’m a bit repetitive but these are unscripted and apparently I can’t remember whatever the hell I just said so just listen at 1.5x.
This Week In The Options Trench
A practical episode for anyone who wants to understand the “shape” of realized volatility and how that informs your expectation of option p/l.
Stay groovy
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