It recently came to my attention that fellow contributor to the upcoming How I Invest Volume 2, Drew Dickson, wrote the following in his essay:
Buy many copies and give them out to the clients or investors in your life! → Pre-order link (Ships Tuesday, Oct 20th).
Drew is very nice, ridiculous, if we care about the meaning of words actually, to be so glazy. I’ve thought a bit about why I can be regarded in this way when I know that I’m no smarter than anyone else on that list.
My thinking patterns just seem different and those differences are probably seen as some variant perception when they’re really just the output of doing a niche job like trading options. The job rewired my brain. It’s going to sound ridiculous, but I’ve had so many readers ask me how to adopt a similar way of seeing. Well, I don’t know, trade ten of millions of options contracts for 20 years and nothing else and see what happens. You might not like what happens. If you had a rosy outlook before, say goodbye to that shit. Paranoia is your new mind loop. But then you know you’re paranoid, so you have to tell yourself that’s an illusion, and before you know it, you are in mental exile in that triangle phantom zone in Superman II.
Ok let me be serious for a beat here.
I’ve said it repeatedly. To understand options requires understanding arbitrage pricing theory, which means crossing the “bridge of asses” in the field of investing. The underpinning of that theory makes concepts like opportunity cost, value over replacement, the idea of an equilibrium, higher-order effects (ie greeks) and a humbling appreciation for counterfactuals explicit and visceral. Notice how central these concepts are to decision-making generally. Jeff Yass minces no words on the topic. He doesn’t think a person can have sound judgement and decision-making skills without an understanding of option theory. Of course this is a maximalist claim, but the point is that being soaked in this stuff will make you think differently. And those differences are what I think are being, for better or worse, perceived as “smart”.
[I know many an option wizard whose decision-making leads them to disaster in relationships, addictions, or any number of objectionable choices. Are they “smart”? In a pointy sense, yes. But when we talk about smart in the general sense, photographic memory ranks far below “I am getting what I want out of life.” A lot of god-given horsepower is a party trick to be fetishized by Mensa members who can’t wait to advertise their membership in said club. You all get a yellow star sticker. But in case you haven’t noticed, the thing you hang your hat on is now commoditized by electricity, and if we’re getting to the root, it’s sunshine and black rocks. “Smart” is great, but we have plenty of it in isolation. For a short window in the 20th century, a nerd might have been able to have a great life with just ore and trading it for wheat, brick, and lumber at the port of “STEM job”. But the island is flooding with ore with each passing day.]
What does this all mean?
If you learn option theory, I can’t promise it will make you smarter, but it will make you think differently in ways that make people think you’re smart. That doesn’t hurt (unless you’re trying to hustle someone).
But I have a better pitch.
It’s fun! It’s a bicycle for the mind. It’s a puzzle.
Whatever draws you to it, you should know about THIS:
Totally free.
Stoked to be a contributor.
It's a site that provides free, no-ads, no-shill education on financial options (calls + puts).
The first course is one I'm now teaching this fall at Charles University in Prague. Lecture notes, videos, assignments.
I’m putting together a bunch of the 201 materials which will come out next year but the 101 materials are starting to be available, including Agustin’s lecture videos and slides at Charles University in Prague.
Some background
The course teaches options the way professional trading firms train new people. Agustin trained as an electrical engineer, joined Jane Street as a trader in 2008, and by 2011 was running all EMEA options trading out of London. He later wrote the excellent Laws of Trading.
The content is nearly identical to the intern and new-hire training they ran for years at Jane Street. And since Jane was born from SIG, I’m not surprised to see the overlap in how this material was covered in my own training.
Why you should care: options and option-like payoffs show up all over finance and daily life, the math ties together probability, calculus, optimization, and economics, you may need to value stock options you get as compensation, and it can become a career.
Learning goals. By the end, students should be able to:
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Explain what options are and how they’re used
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Relate options to each other and find value bounds with arbitrage arguments
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Price vanilla options with both closed-form and numerical methods
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Manage the risks of an options portfolio
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Build and use volatility models of option curves and surfaces
Non-goals
The course explicitly won’t teach profitable trading strategies. The slide says anyone hoping for “how to make money trading” should take a different course.
Prerequisites
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Basic single-variable calculus
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Basic Python programming
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No prior experience with markets or trading is expected
Format
One lecture a week plus one supervision session a week.
Syllabus
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What Is an Option? Contracts, payoffs, exercise rights
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The Value of Optionality: Uncertainty, distributions, time value
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Put-Call Parity and Synthetic Equivalence: Synthetic positions, static arbitrage
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Pricing by Replication: Binomial hedges, cash, fair price
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Black-Scholes: Dynamic hedging and the pricing argument
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Implied Volatility: Turning option prices into vol quotes
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Delta and Directional Hedging: Hedge ratios, changing exposure
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Gamma, Theta, Vega, and P&L: Convexity, decay, volatility risk
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Volatility Curves and Surfaces: Smiles, skew, strike, expiry
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No-Arbitrage and Distributions: Bounds, convexity, implied probabilities
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Financial Time and Variance-Time: Trading time, calendar time, events
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Stochastic Volatility Models: Random volatility, jumps, calibration
Random but related
My mother recently called to tell me she’s taking an options course at a local college in NJ. Her sister (my aunt) is trading the “wheel” strategy and has encouraged her to learn about options. My mother will never trade as she’s very skittish about anything that looks like gambling, but she enjoys math and puzzles and is always wanting to make sure her brain health is ok so she’s using options as her latest challenge. Plus she knows someone who can help when she’s stuck.
Separately, my uncle, my mother’s brother, has actually been a retail options trader for over 20 years (he was on an fx desk in the late 80s or early 90s) but has been a self-employed tax accountant and trader since.
If you’re wondering whether we talk shop at gatherings…nope. I say my boilerplate “don’t bet more than you are comfortable losing” as I’m in violent agreement with Victor Haghani when he says you can’t change minds.