Moontower #74

Friends,
With the upcoming school year set to be remote Yinh and I panicked. We felt like distance learning was the worst of all worlds and not suitable for young children (our kids were in preschool and 1st grade). We wanted to know our options. So we looked into homeschooling. As in unenrolling from public school and taking ownership of educating our boys.

In researching, we were introduced to a friend of a friend, who whether she likes it or not, must now be our friend too because she’s amazing and we won’t take no for an answer.

Why do I feel that way?

Because of her amazing response when I asked her for guidance on homeschooling. Remember I was basically a stranger reaching out. I got her permission to publish it on my site. I’ve edited it modestly, adding some headings and changing her girls’ names.

I hope this enlightens you as much as it did Yinh and I. Even if you never had an interest in homeschooling there is a lot of great insight and resources in here.

The Post Every Prospective Homeschooler Needs (Link)

The Money Angle

This is a dramatization loosely based on the 2016 election.

It may be hard to remember, but leading up to the election the market would sell-off when Trump’s odds increased and vice versa. So let’s make some assumptions.

• It’s the morning of the election, the SPX index is trading for \$100 and the election day straddle is trading for \$10.
• If Donald Trump wins the SPX goes down. If he loses the SPX goes up.
• The SPX price is completely binary. It will go to either an “up price” or a “down price”.
• Trump is liquidly trading at 10 cents on the dollar to win the electoral college in betting markets.

If Trump wins the election where does the SPX go?

[This section is blank for your algebra]

If you felt lazy here’s my work:

• The expected value of the 1 day change in SPX is 0. It’s fairly priced at \$100.
• The probability of the SPX going down is 10% since that’s Trump’s implied probability of winning.

For both of these statements to be true in a binary situation we know the expected down move which occurs 10% of the time is 9x the expected up move when Trump loses.

P(up) Stock_up + [1-P(up)] x Stock_down = 0
.9 x Stock_up + .10 x Stock_down = 0
.9 x Stock_up = – .10 x Stock_down
Stock_down / Stock_up = -9 / 1

• Now let’s bring in the straddle.

The straddle is trading \$10 or 10% of spot. The straddle is the expected absolute value of the change in the SPX.

P(up) x Size_up + [1-P(up)] x Size_down = Straddle
.90 x Size_up + .10 x Size_down = 10

Using the substitution that Size_down = 9 x Size_up:
.9 x Size_up + .1 (9 x Size_up) = 10
1.8(Size_up) = 10

Size_up = \$5.55
So Size_down which is 9x Size _up must be \$50

If Trump has a 10% chance to win the election tanking the market AND the straddle is worth \$10 then the market was expected to rally 5.55% if he lost. If he won the implied sell-off was 50%!

If that didn’t sound reasonable to you (but you were certain the event was a true binary) then there are relative bets to be made between vertical spreads, outright straddles and election odds depending on what you disagreed with.

To recap:

The exercise here was to turn a binary event with

a) an implied probability

and

into an implied up and implied down price after the election.

Formulas you can remember based on the above algebra:
Up Move Magnitude = straddle / (2 x P(up))
Down Move Magnitude = Up Move x P(up)/P(down)

A little post-script based on my memory of 2016. At the beginning of the year, there were giant buyers of gold and upside call verticals in gold. Whispers were that it was Drunkenmiller and perhaps a few other macro whales. Well, whoever was buying these call spreads was spot on. Gold had a sharp rally in Q1 of 2016 before settling in somewhere like up 20% in the first half of 2016. A big move for a sub-15% vol asset.

Fast forward to election night. The futures markets were unhinged. In the peak of panic over Trump winning, the SPX was down nearly 10% while gold spiked higher. By the light of the following morning, the market had whipsawed from those points and Drunkenmiller or whoever was leaving footprints in gold had allegedly used the election night headfake to rebalance the long gold position on the highs into an SPX position on the lows.

The 10% straddle seemed to be well-priced, but somehow the GOAT macro trader realized the sign of the Trump move was exactly backward!

Some broker chatter I loosely recall after the election:

Banks that were long Nikkei variance hedged with short US variance allegedly crushed it that night as the Nikkei observation for the variance calc was down over 5% while the US point-to-point return was little changed despite the hellacious path. The Japanese markets closed in the middle of the US night when SPX was at its lows.

There are a number of exotics and bank traders who read this so maybe one of them will fill me in on the color or veracity of that 🙂

Last Call

• Can Duruk with a well-written note, The Other Digital Divide (Link)

The divide between Silicon Valley and the rest of the country is wider it has ever been. Half my Twitter is people looking to angel-invest their millions in apps, and the other is reporters documenting the latest lows America has hit. This doesn’t bode well for the country, and will become a political and social flashpoint sooner than later.

• Extreme optimism and fatalistic pessimism may seem to be stark opposites, but they both end in apathy. (Link)

A thread of ideas from the likes of Howard Marks, Peter Thiel, and Paul Graham I captured from Max Anderson’s newsletter.

• Want to poll your friend’s net worth or figure out the average salary for your job title? Well, here’s a way to ask your friends or peers without anyone giving away their own. It’s a simple lesson in encryption/decryption using a “mask”. Good thing to try in one of your group chats, just make sure people only send the running total to the next person in the order. You could also just do it around a dinner table too. I’m going to try something similar with the kids and cousins today. (Link)

From my actual life

When I moved to CA in 2012, I thought earthquakes were the greatest natural disaster risk.

The forests of CA: “Hold my beer”

CA is on fire again. People are being displaced in what is now a late-summer tradition. We have been very lucky so far since our only inconvenience is needing to wear a mask inside our smoky house. At least we have a house.

Afternoon activities this week have included staying indoors and watching Floor is Lava on Netflix. This is not a twisted programming choice given the circumstances just the whim of the kids. If you must know, it’s like American Ninja Warrior except nobody is a ninja. Or a warrior. Or coordinated even. But at least we had power. We didn’t experience any of the rolling blackouts this week when it hit 105 degrees. Lucky.

Other activities included calling my insurance company to review my fire coverage. I’ve started to hear stories about friends unable to even find companies to underwrite or renew policies My company, Farmers, does provide insurance. It’s expensive but at least available. Lucky again.

I’m gonna stop now because I feel like I might be channeling too much of the first 90 seconds this bit by the late Greg Giraldo. Just replace “in this economy…” with “during Covid…”. (Link)

A warning: you probably shouldn’t listen past the first 90 seconds.

Giraldo is one of my favorite comics and I got to see him live a few times. He’s vulgar as hell. He lived fast and died young. He also had a JD from Harvard and Wikipedia says he had a near-perfect LSAT. He reminds me of a mix of Carlin and 1980s Denis Leary. I never listened to Kinnison but I wonder if he fit that mold. Check him out at your own risk.