In this issue:
- racing to a mountaintop or just another “collection of tradeoffs”
- how high implied vol can work against you or for you
- the greatest intern class of all time?
Thursday’s post what I want my kids to know struck a nerve with readers for different reasons. A close friend noted that it seemed pretty male-centric. Having grown up with only a brother himself, he probably wouldn’t have noticed if it wasn’t for raising a daughter now. He wrote me a thoughtful email about it, analogizing between seeing the world as a mountain to climb (male-coded lens) vs a more sea-like horizontal interconnectedness where you are bombarded by both supportive and punishing waves. A line he wrote that resonated:
women are more in-tune or more impacted by the reality there may not be a peak to this mountain. That the mountain itself is just a projection of a higher-dimensional reality and the “peak” is really just a collection of tradeoffs.*
*You can find my immediate response to this further below but it’s secondary to the message front-and-center
I think seeing a “collection of tradeoffs” does several things.
First of all, it immediately flattens the idea of a peak or at least places them as narrow spires on a plateau. You can be the greatest in the world at XYZ, but you haven’t conquered life. Elite performers don’t usually sugar-coat the cost of these conquests. Sometimes the public sees the price they pay when their lives crumble and wonder if it’s because they are stunted in every other domain than the one they dominate. The self-aware ones are effusive in acknowledging the support of their families in enabling what is ultimately a pursuit of glory and even posterity.
Secondly, seeing a “collection of tradeoffs” loosens the creativity muscles. If you view life as a race to some mountaintop, you will restrict the routes your life can take. That artificially narrowed menu will be written by your immediate surroundings, which is already a skinny slice of human experience.
I want to pause on that for a moment. The narrowness of the menu we choose flows from the most tyrannical source: random path dependence. Where you were born, in what time, and to whom? It’s probably adaptive to ignore that perspective and trudge forward, but I admit it’s a thought that intrudes just enough to bug me.
I was watching videos of people covering songs I like on YouTube the other night. I will often wander to the long tail of videos that have very low view counts. It feels like you are watching something vulnerable and isn’t really intended for your eyes except for that they posted it publicly. I watch and I wonder. Who is this person? What’s their life like? I’m getting an energy from their performance but they have no idea who I am, where I am, and that I’m watching this a decade after they posted it.
I’m several of the 34 views of this vid:
It’s not a nice voice. The man looks unwell. But it’s extremely expressive. The way he performs it. The instrumentation he chose. The fact that he looks enigmatically young and old at the same time.
Futurism and space travel represent adventure and vastness. Sheer wonder reminds us how small we are. But I see vastness in a simple video like this. This individual is made of the same stuff I am, but we are aliens to each other. Maybe or maybe not. But that’s the point. The mystery creates a sense of vastness. It is the wonder, that right here on Earth, the lyrics of the song hold:
See the animal in his cage that you built
Are you sure what side you’re on?
Better not look him too closely in the eye
Are you sure what side of the glass you are on?
See the safety of the life you have built
Everything where it belongs
What if everything around you
Isn’t quite as it seems?
What if all the world you think you know
Is an elaborate dream?
And if you look at your reflection
Is it all you want it to be?
What if you could look right
Through the cracks?
Would you find yourself
Find yourself afraid to see?
Shortly after that vid, the YT algo served me Trent Reznor’s speech when he inducted The Cure into the Rock and Roll Hall of Fame. He eloquently transmits the idea that their music and way of being spoke to so many people who didn’t feel like they belonged. People who likely saw something besides life as a “mountain”. When Trent first heard The Cure he thought they were making music directed at him.
Trent is gesturing at the thing every great artist or artisan understands. The skeleton key is to connect with others authentically. To give people something they deeply want because you understand the yearning yourself. Artists express and artisans solve. One has fans, the other has clients. Sometimes the artisan is so good the clients are fans. In both cases, the relationship is deeply empathetic. I call it a skeleton key because that thing is different for everyone but it unlocks the same door.
The door to thriving.
*As promised, this was my reply back to my friend:
I see what you mean and yes I agree its gendered. I think underneath it all, my sense of how the world operates is probably from a biological place — women are default valuable (their overt subjugation in much of the world is a demented response to this…like a male attempt to take back power that biology confers) whereas a man is entire worth depends on what he can provide. Modernity changes the calculus to a meaningful extent (in doing so trades off against novel considerations) but I don’t think it has created a new calculus. At the end of the day, there is a competition and as with any competition, there are niches that will provide a better harbor for some individuals to strive within based on their unique traits and views.
Insofar as my writing is narrow, it is written from the perspective of being subsumed by one of these niches. I’m swimming in the “water” in the David Foster Wallace sense of the word. But of course, the audience is self-selected and therefore assumed to be in the same water.
The beauty of travel is to be able to look back home and see the water for what it is. Something that has a particular pH balance that nourishes parts of our souls and sickens other parts.
Money Angle
🔗 How to Short a Bubble | 10 min read
Outstanding post. Alexander Campbell on why shorting the thing going vertical is the worst possible expression of being bearish. As something goes parabolic your exposure grows with it (I have a collection of posts on why shorting is complicated).
The vol that accompanies a bubble renders the puts useless (more on that in the Masochists section). Instead, Campbell proposes a better risk-adjusted approach by identifying:
- the wedge: the thing that kills it the bubble. He suggests if AI is the bubble, rates are the wedge, and inside every bubble there’s a weakest link that needs the bubble to keep accelerating just to survive a pause
- the victim: the cheap-vol neighbor that gets dragged down such as airlines pre-COVID, BAC instead of housing CDS in ‘08.
- confirmation: wait for a trend to break then press specific shorts
🎙️PTJ on Invest Like The Best | podcast link
Patrick O’Shaugnessey interviewed legendary macro trader Paul Tudor Jones. It’s self-recommending, but here are the 2 parts that stayed with me:
From contraction to expansion on the issuance side
PTJ: If I think of some really, really big accidents, most of them have the same underlying reason, the same underlying foundation, which is some too much leverage somewhere. Most of the leverage, most of the time – if I think of the big ones – were derivatives inspired. Either futures or options.
1987, that crash was 100% portfolio insurance. A hundred percent. Had they had limits, which they didn’t, it would’ve been 10%, maybe 15% max. But that was a hundred percent derivatives. If I think about 1998, Long-Term Capital, big derivatives. They had a huge balance sheet with a lot of derivatives they were offsides on.
2000 was a little different. 2000 was the easiest bear market I’ve ever seen in my whole life. It’s got so many similarities to right now, in the sense that the bear market of 2001 and 2002 were a consequence of all the IPOs in ’99 and 2000. And then as they unlocked, you just had this never-ending cascade of selling, that’s a great way of putting it. And we’re getting ready – I want to say that the contemplated IPOs for next year are going to be five or six percent of market cap. So why are we where we are right now? Because we’ve been retiring two or three percent of market cap, probably a little less than 2% of market cap, every year without fail for the past 10 years [through buybacks.]
And so now all of a sudden, you’re gonna completely reverse that math. And so, I don’t think it necessarily happens instantaneously with the IPOs, but then there’ll be the unlocks. So you can see a situation where, okay, maybe we go through some kind of rolling top. And then 18 months from now – six months, we’ll have to look at the unlock schedule. But you’re going to want to watch those because that’ll just be adding equity supply. And you’ve already gonna be diminishing the buybacks because of all the commitment to capex from the hyper-scalers. They’re already gonna be eating into their cash flow.
This one sticks with me because I’m a “the market is just positions and flows”. There’s nothing magical about historical rates of return, margins and so forth. You have tradeable capital in the form of stocks and bonds. Issuance is the supply. Demand comes from savings. If savings increase faster than paper prices go up. And this is not linear because the marginal propensity save one’s millionth dollar is higher than one’s thousandth dollar.
Prices have gone up a lot so it makes sense for a narrow base of supply owners should dump it on the wider marketplace. I’m quite curious if the public markets will value these companies as highly as the illiquid private markets do, but since the issuance was be low float, I assume the owners share my curiosity and wanna feel things out before trying to realize their god-wealth.
Life advice
At the end of the interview PTJ (emphasis mine)
We can humbly devote ourselves to finding the kindness within ourselves and the goodness within ourselves, and transmit that to somebody else during that day.
I think that’s the secret to happiness. You don’t have to worry about yourself. You have to worry about, “How am I going to brighten someone else’s day?” And with that attitude, one, you’ll always be happy. I’m just gonna spend this one day doing this one outward act. And if you repeat it enough pretty soon you take “I should” and they will become “I ams”.
So if you take that mentality, that I want to do this wonderful act of kindness for someone else, pretty soon you become an incredibly kind person. It becomes natural. It becomes instinctive and organic. And it’s gonna brighten your day. You’ll have such a positive outlook on life.
I’m in the camp that happiness is a self-effacing end. You never get it if you aim at it. You’ll probably get more mileage from the definition of humility that it’s not about thinking less of yourself but thinking about yourself less (I don’t know who said that. There’s debate over whether it was C.S. Lewis. For all we know it was Mark Twain. Either way, it’s public domain.)
Money Angle for Masochists
Here’s how high vol works against you
This echoes Campbell’s thought about using puts to trade directionally once an asset has already made a giant move).
When you are 100+ vol, it’s not surprising the market puts your odds of getting cut in half at 1 in 3 proposition.
It’s hard to make money in a reasonable risk-adjusted away once an asset is already high vol since it’s hard to size it without risking your neck.
It is well within the meat of the distribution for SNDK to get cut in half this year. That’s just a good baseball player’s chance of getting a hit or a typical NBA player hitting a 3 in a game (or missing a 3 in practice).
How high vol works for you
The high vol is a gift to the natural holders. Millennial employees can lock in their unborn grandkids’ inheritance.
A non-technical way to appreciate how high vol creates this opportunity in upside call vs downside put differentials:
Imagine a stock starts at $100. It gets to $125. From $125 to $150 is only 20%
But if the stock fell to $75 the distance from $75 to $50 is 33%
Both $50 and $150 are 50% from the initial price, but in a compounding sense 150 is much “closer” to the starting value than $50. The higher the vol the less “distance” a fixed dollar move represents. As implied vol increases OTM calls grow faster in value than OTM puts. This is the source of the attractive pricing you see in the risk reversal (ie option collar).
That tweet comes from Dean Curnutt of The Alpha Exchange Podcast. He’s a partner in an option brokerage firm I’ve known for a long time. I told him he needs to buy an SF realty company, since risk reversal-financed $10mm SF Victorian pipeline is unmanned!
Speaking of, if you wanted to bet on AI without access to private shares, real estate on leverage would have worked. See Redfin economist Daryl Fairweather’s Is the Bay Area in an AI Housing Bubble?. I hear from locals who own a bunch of SF RE that the bid is mostly in single-family and multi-family rental units are not getting the hockey stick treatment. The rents have been exploding higher, however. And to think coming out of COVID, you couldn’t give away an SF condo. Super high vol asset. They need options!
Interestingly, home prices locally in the burbs have been dead money since around 2023 although having a step-function increase from the Covid era. I can think of at least one person who rebalanced, selling their burb home, moving to a cheaper state but plowing some of the proceeds of the sale into a depressed SF condo.
Geniuses
This is just fun.
My son is in 7th grade. This is Scott Wu in 7th grade. But it doesn’t matter what grade. Tough day for the genius girl standing next to him. It’s just a 1 minute vid, watch it before you read ahead:
I just wanted to share the trick I think Scott did to do 255² – 245² so quickly.
You have to immediately recognize that a difference of squares is the same as the sum of the 2 numbers times their difference. You’ve all done this in school:
a²-b² = (a+b) (a-b)
My guess is Scott quickly reasoned:
255 + 245 = 500
255 – 245 = 10
500 x 10 = 5000
If you are regularly practicing math I’d guess converting “difference of squares” which is a canonical form into its factored form is quite natural.
From there, the particular numbers chosen make this problem quite easy to compute but yea he’s fast as hell. And for the final question, you witness insane reading speed.
This Week In The Options Trench
We talk about greeks in understandable ways (I hope!)
Stay groovy
☮️
Moontower Weekly Recap