Battle Scars As A Call Option — The UNG Experience

Last week’s masochism had 2 parts.

  1. A hands-on walkthru of spotting a hidden option in an ETFThe walkthru builds intuition socratically and since it’s already in question-and-answer form you can use it with minimal modification to scaffold an interview question.Again, that link: Financial Hacking: ETF vs Negative Oil Futures
  2. A bit more advanced was the description of how I actually traded it in real life. A fellow professional option trader endorsed the approach and I’m not above shilling that:

I’m flattered to be given credit for explaining something so anyone can understand it. But recognizing why the pricing was the way it was, is not an act of “galaxy brain” genius. It was experience.

This is worth an explanation with a generous helping of personal color.

Back in 2009, I was trading as an independent (I had a backer deal where I put cash up in escrow that represented the most I could possibly lose and in exchange for that and some economy of scale stuff, the backer got 30% of my profits). I had left SIG a year earlier but because of my non-compete couldn’t trade oil-related derivatives.

I could trade natural gas options though. My backer, despite bankrolling about 100 traders, some of them with large businesses employing as many as 20 people, never had anyone trade natty options for them. My pitch emphasized a “steady hands” approach. As a dyed-in-the-wool market maker, I had little use for opinions or fundamental research. I had an arbitrage mindset — I would focus on my advantages of being a grinder. I stood in the pit, trading order flow that came to the floor, I had a partner who handled all the voice brokers upstairs and we had an assistant who made markets on the screens. The 3 sources of info would allow us to stitch a master vol surface or “sheet” that we would push out to all 3 spokes in an ongoing conversation that provided feedback as to when we should update fair values.

[Multiple times per day…”raise summer small calls 2 clicks, multiple brokers bidding and lower Jan meaty puts a point — I’m seeing consumer flow buying calls on winter fence strips, they haven’t printed yet”. The PitBulls experience rhymes with this. See Mock Trading]

Our backer was focused on futures and futures options but I had spent most of my first 6 years as a trader in ETFs — so I convinced them to let me build out the infra to price and trade options on UNG as a 4th spoke to find relative value trades against our core options book.

I was long UNG options vs a short in NG futures options because UNG vol traded at a discount.

Bad timing.

In the summer of 2009, in the wake of what Goldman deemed the “commodity super cycle” while pushing commodities as an asset class, commodity ETFs were under scrutiny for allowing financial speculators to more easily drive up the price of energy, food, and materials. Natural gas prices were in the crosshairs — the UNG fund announced it would cap the number of shares it would issue.

With a shortage of shares, UNG surged to a large premium over NAV (I don’t remember exactly what it was but something like 20% is lodged in my head). A large player had done their homework placing a smart 9-figure bet — they “created” all the remaining shares betting this would happen. I won’t speculate who that was in print but my hunch is not unironic.

I was in a bad spot.

Every time gas futures sold off, UNG basically stayed unchanged — the premium to NAV would just expand. When NG rallied, UNG still barely moved — the premium simply narrowed. Every day I was forced to pay theta on my UNG options while getting chopped to pieces on my short NG options. Meanwhile, the vol discount widened from about 1 point (the threshold where the arb became interesting) to about 20 points! Without a proper “creation” function, UNG was no longer hinged to NG futures.

I lost about $250k of my own money in under 2 weeks…a multiple standard dev p/l event for that time frame (I realize this is a quaint sum in a world where that’s the cost of a kitchen with red-knobbed ranges but even back then I’m like buy me a drink before you do me so dirty).

[My backers, to their credit, were understanding. They never flinched and allowed us to continue trading and building. We expanded into trading options on SLV, BAL, JO and SGG as our footprint in futures options grew.]

At the risk of overgeneralizing, a few things stand out:

  1. Market risks (ie prices moving up and down) are the most trivial. It’s the ever-present possibility of rule changes (and the politics that can drive them) that remind you that the last line of defense in risk management are constraints to gross exposures not just nets.The UNG trade is also reminiscent of that trope about how a casino’s risk manager is more likely to lose sleep over an Ocean’s Eleven heist scenario than a string of bad luck at the tables.
  2. Battle scars are great teachers. When USO traded at a premium as CL futures went negative, my reflex was not “that’s stupid” but “there’s more to this”. Even though UNG and USO went premium for different reasons I wouldn’t have figured out the gameplan as fast as I needed if I didn’t have that prior weird (and painful) pattern to match to. This is also an argument for having a team of trusted people to bounce ideas off. You don’t have to touch every stove yourself.

With this fuller context, you can re-visit the “galaxy brain” approach to trading USO options during that Covid dislocation:

🔗Options on USO when oil went negative

Learning To Appreciate Learning

In the past few weeks about 5-10 people have reached out to ask me for advice in the vein of “my kid is 6 and likes math and what should I put in front of them to foster this”. They are usually looking for specific answers.

I offer a few things my kids have enjoyed (everything can be found on the blog, ie here and here) but I want to be clear — I’m no expert. I’m just like the rest of the parents who have the same goal of watching their kids’ curiosity flourish.

To kill many birds with one stone here’s the gist of my email responses:

I don’t create pressure. Let learning be a source of joy. Insight is its own reward and to train someone to appreciate that when they are young is a life-long gift because they can find stimulation in the pleasures of the mind and the mundane.

Sure, math proficiency has plenty of instrumental value in life, but appreciation and beauty is the bigger gift here (I also suspect this is an antidote to the doping that broader media does to people — if you find beauty in the evergreen you don’t need to constantly be taking drags from the current times and you’re perspective and emotional state will be better off for it. No science behind that — just my hunch).

You are already doing the single largest muscle movement –> literally giving a shit about your kids’ curiosity flourishing. Like seriously that’s 90%. The specific instances of expression — coding, writing, drawing, cooking, composing — or any other forms of creation are secondary. Creating not just consuming is the key because by being able to manipulate the world (I don’t mean manipulate in some evil sense) around you, you reinforce your agency.

When I see fear and extreme tribalism I see people retreating away from agency and frankly accepting some learned helplessness. Your role as a guardian is to shepherd a healthy sense of agency (unhealthy would be to program an overconfident narcissist).

Code and writing are symbol-manipulative domains — some will gravitate to that more than say carpentry or being a physical maker. I’d be open-minded about the specific expression and focus on nurturing the upstream creation and play impulses.

And if you got this far you exemplify an ironic phenomenon — the people who reach out looking for help/guidance/opinion/validation on their approaches are the people who don’t need to (this is not a back-handed way of saying don’t reach out btw, it’s just an observation!)

This young portal in the Moontower codex is an attempt to consolidate some specific learning stuff if interested:

🧠Moontower Brain Plug-In

Moontower #188

Friends,

In the past few weeks about 5-10 people have reached out to ask me for advice in the vein of “my kid is 6 and likes math and what should I put in front of them to foster this”. They are usually looking for specific answers.

I offer a few things my kids have enjoyed (everything can be found on the blog, ie here and here) but I want to be clear — I’m no expert. I’m just like the rest of the parents who have the same goal of watching their kids’ curiosity flourish.

To kill many birds with one stone here’s the gist of my email responses:

I don’t create pressure. Let learning be a source of joy. Insight is its own reward and to train someone to appreciate that when they are young is a life-long gift because they can find stimulation in the pleasures of the mind and the mundane.

Sure, math proficiency has plenty of instrumental value in life, but appreciation and beauty is the bigger gift here (I also suspect this is an antidote to the doping that broader media does to people — if you find beauty in the evergreen you don’t need to constantly be taking drags from the current times and you’re perspective and emotional state will be better off for it. No science behind that — just my hunch).

You are already doing the single largest muscle movement –> literally giving a shit about your kids’ curiosity flourishing. Like seriously that’s 90%. The specific instances of expression — coding, writing, drawing, cooking, composing — or any other forms of creation are secondary. Creating not just consuming is the key because by being able to manipulate the world (I don’t mean manipulate in some evil sense) around you, you reinforce your agency.

When I see fear and extreme tribalism I see people retreating away from agency and frankly accepting some learned helplessness. Your role as a guardian is to shepherd a healthy sense of agency (unhealthy would be to program an overconfident narcissist).

Code and writing are symbol-manipulative domains — some will gravitate to that more than say carpentry or being a physical maker. I’d be open-minded about the specific expression and focus on nurturing the upstream creation and play impulses.

And if you got this far you exemplify an ironic phenomenon — the people who reach out looking for help/guidance/opinion/validation on their approaches are the people who don’t need to (this is not a back-handed way of saying don’t reach out btw, it’s just an observation!)

This young portal in the Moontower codex is an attempt to consolidate some specific learning stuff if interested:

🧠Moontower Brain Plug-In


A Word From Moontower’s Sponsor…

PitBulls is the updated brand of StockSlam.

A large market-making firm is hosting PitBulls Sessions on May 17, 18, and 19 in Chicago. This is our 3rd series of doing these after NYC and SF. Come learn, have fun, and meet people with similar interests.

It’s totally free…and even better our host is always hiring!

You can learn more and apply here.


Money Angle

I made this for you.

🔗Investment Blogs I Read

 

Money Angle For Masochists

Last week’s masochism had 2 parts.

  1. A hands-on walkthru of spotting a hidden option in an ETFThe walkthru builds intuition socratically and since it’s already in question-and-answer form you can use it with minimal modification to scaffold an interview question.

    Again, that link: Financial Hacking: ETF vs Negative Oil Futures

  2. A bit more advanced was the description of how I actually traded it in real life. A fellow professional option trader endorsed the approach and I’m not above shilling that:

I’m flattered to be given credit for explaining something so anyone can understand it. But recognizing why the pricing was the way it was, is not an act of “galaxy brain” genius. It was experience.

This is worth an explanation with a generous helping of personal color.

Back in 2009, I was trading as an independent (I had a backer deal where I put cash up in escrow that represented the most I could possibly lose and in exchange for that and some economy of scale stuff, the backer got 30% of my profits). I had left SIG a year earlier but because of my non-compete couldn’t trade oil-related derivatives.

I could trade natural gas options though. My backer, despite bankrolling about 100 traders, some of them with large businesses employing as many as 20 people, never had anyone trade natty options for them. My pitch emphasized a “steady hands” approach. As a dyed-in-the-wool market maker, I had little use for opinions or fundamental research. I had an arbitrage mindset — I would focus on my advantages of being a grinder. I stood in the pit, trading order flow that came to the floor, I had a partner who handled all the voice brokers upstairs and we had an assistant who made markets on the screens. The 3 sources of info would allow us to stitch a master vol surface or “sheet” that we would push out to all 3 spokes in an ongoing conversation that provided feedback as to when we should update fair values.

[Multiple times per day…”raise summer small calls 2 clicks, multiple brokers bidding and lower Jan meaty puts a point — I’m seeing consumer flow buying calls on winter fence strips, they haven’t printed yet”. The PitBulls experience rhymes with this. See Mock Trading]

Our backer was focused on futures and futures options but I had spent most of my first 6 years as a trader in ETFs — so I convinced them to let me build out the infra to price and trade options on UNG as a 4th spoke to find relative value trades against our core options book.

I was long UNG options vs a short in NG futures options because UNG vol traded at a discount.

Bad timing.

In the summer of 2009, in the wake of what Goldman deemed the “commodity super cycle” while pushing commodities as an asset class, commodity ETFs were under scrutiny for allowing financial speculators to more easily drive up the price of energy, food, and materials. Natural gas prices were in the crosshairs — the UNG fund announced it would cap the number of shares it would issue.

With a shortage of shares, UNG surged to a large premium over NAV (I don’t remember exactly what it was but something like 20% is lodged in my head). A large player had done their homework placing a smart 9-figure bet — they “created” all the remaining shares betting this would happen. I won’t speculate who that was in print but my hunch is not unironic.

I was in a bad spot.

Every time gas futures sold off, UNG basically stayed unchanged — the premium to NAV would just expand. When NG rallied, UNG still barely moved — the premium simply narrowed. Every day I was forced to pay theta on my UNG options while getting chopped to pieces on my short NG options. Meanwhile, the vol discount widened from about 1 point (the threshold where the arb became interesting) to about 20 points! Without a proper “creation” function, UNG was no longer hinged to NG futures.

I lost about $250k of my own money in under 2 weeks…a multiple standard dev p/l event for that time frame (I realize this is a quaint sum in a world where that’s the cost of a kitchen with red-knobbed ranges but even back then I’m like buy me a drink before you do me so dirty).

[My backers, to their credit, were understanding. They never flinched and allowed us to continue trading and building. We expanded into trading options on SLV, BAL, JO and SGG as our footprint in futures options grew.]

At the risk of overgeneralizing, a few things stand out:

  1. Market risks (ie prices moving up and down) are the most trivial. It’s the ever-present possibility of rule changes (and the politics that can drive them) that remind you that the last line of defense in risk management are constraints to gross exposures not just nets.The UNG trade is also reminiscent of that trope about how a casino’s risk manager is more likely to lose sleep over an Ocean’s Eleven heist scenario than a string of bad luck at the tables.
  2. Battle scars are great teachers. When USO traded at a premium as CL futures went negative, my reflex was not “that’s stupid” but “there’s more to this”. Even though UNG and USO went premium for different reasons I wouldn’t have figured out the gameplan as fast as I needed if I didn’t have that prior weird (and painful) pattern to match to. This is also an argument for having a team of trusted people to bounce ideas off. You don’t have to touch every stove yourself.

With this fuller context, you can re-visit the “galaxy brain” approach to trading USO options during that Covid dislocation:

🔗Options on USO when oil went negative

 


From My Actual Life

Is this just a Bay Area thing?

This is a promo to tour your rich neighbors’ homes.

It’s a thing that happens every year to raise money for some great causes so restraint is in order…but also…gag me with your maître d’s handkerchief.

They used to be “kitchen tours” so you could at least pretend you were getting re-model inspiration. But the title now feels like saying the quiet part out loud. I’ll admit — the setup is quite clever. Since the ticket proceeds go to charity, all parties can whitewash the White Lotus psychology off their bodies.

Yinh was just telling me of an interview she listened to where the guest’s goal was to be a “billionaire”. Not to create X or Y or whatever where wealth would be a byproduct, but literally to be a billionaire.

To have your mind preoccupied with attaining an amount of money you could never spend well beyond the point of diminishing returns is a way to spend your attention I suppose. If fetishes are any indication there’s no limit to the breadth of what humans get off on. Fine, you do you. But this desire to be a billionaire, a feat as unlikely as playing in the NBA, does feel like a modern virus.

Sometimes I wonder what it must be like to not have a 90s teen, haterade, shoegaze disposition. It’s quite maladapted for the times we live in. Times where if you don’t aspire to “generational wealth”, the Gary V tribe will tar-and-feather you as a commie.

There’s a certain cringe I feel around such hustle-types that is partially my own un-therapized hangups and partially captured by Venkatesh’s sentiment here (bold is mine):

The phrase “man in the arena” has recently been doing the rounds. It comes from a 1910 Teddy Roosevelt speech, and points to an archetype of a risk-taking doer who is in the fray making the hard decisions, even as self-important spectators keep up ceaseless unhelpful commentary. It is an elevated version of the more familiar solutionist/doerist/builder (builder in Web3) archetype.

In theory, the “man in the arena” has the highest agency in a situation, and is positioned to either reap the biggest reward in case of success, or pay the highest cost in case of failure. At their notional best, men in the arena are warrior-saint-heroes who take on great risks on behalf of humanity, and steal promethean fires from the heavens for the rest of us to enjoy. Even if it means risking eternal torment of the sort Prometheus had to endure. Though the archetype does not address accountability to others, it has strong connotations of virtuous responsibility and conscientiousness. The “man in the arena” believes in noblesse oblige.

In practice, the typical “man in the arena” is usually executing a cunning heads-I-win-tails-you-lose gambit, and isn’t quite the saint the pious startup discourses makes him out to be. But that’s fine. The man in the arena is after all merely human, with very human levels of lust for rewards and aversion to losses.

I’m generally sympathetic to people in the arena, even if I don’t take their self-serving accounts of themselves at face value. I like making Arena Man jokes (by analogy to The Onion’s stock character, Area Man) to poke fun at their self-importance and pious posturing, but in general, I am not ill-disposed towards them. Of course, Arena Men look to privatize gains and socialize losses, and try to come across as martyrs to greater causes whatever the outcome, but then, so do most people in most situations.

When Midjourney-esque AI models extend to video the first prompt I’m giving it:

“Create a celebrity deathmatch where Arena Man fights Area Man with 90s Teen As the ref and Florida man in the stands”

And for love of zeus, if your definition of being a man-in-the-arena invokes the words “self-storage” or “passive income”…you’re telling on yourself.


The 90s Thing

Chris Eberly pointed me to Chuck Klosterman’s The Nineties with the comment:

I’ve had this theory for a while that we are unable to fit in today because the 90s was about slackers, anti brand, Office Space, etc. this book actually covers quite a bit of it with facts both for and against this idea ..

I’ve read many of Chuck’s books (one of the most popular investing posts I’ve ever written references my favorite What If We’re Wrong) so this 90s book is going straight into my veins. I’m sure you’ll hear about it.

Stay groovy

☮️

Reading As A Magical Power

Something I recently started doing that might be of interest to parents:

I’m reading “Journey to the Center of the Earth” by Jules Verne to my almost 7-year-old.

Written in the 1800s, the writing style is challenging.

So I read a bit, then I “translate” it into a more natural language for him. I’ve explained to him that if he reads the books he’s able to read and I read this book to him (instead of him trying to read it himself, which he was trying to do, but I have zero confidence he’s understanding), the combination will give him “magic.” I try to create some mystique around reading because I want him to think reading gives him special powers. Because that’s a fun thing to think, of course (and we probably should think about more things in such ways because it helps us notice the joy in being alive and stuff).

One of the chapters ended in a particularly suspenseful way. And I tried to explain the concept of suspense to him (to his and his teacher’s credit, he mentioned that when they read in school, they pause to try to predict what will happen next in the story).

So with the idea of suspense established, I just asked him to come up with suspenseful sentences. I’ve never asked him to do that, and he didn’t reply with anything substantive, but that’s okay, whatever… (I did give him an example: “The boy thought he locked the door, but then he saw the knob turn,” and my son goes, “that would freak me out,” and since this was just before bed, I felt a bit guilty..oops)

Just sharing for other parents’ benefit, I think we all want to find ways to show the joy of reading and wanted to start showing him “techniques,” a word I asked Alexa to define for him. So he can identify the author’s “weapons” and so maybe one day he can use them when he writes.

Bootstrapping Agency

In Wednesday’s Munchies, I pointed you to Venkatesh Rao’s brain-expanding interview on Infinite Loops. One view I’m still marinating on is how finding a sense of meaning is not “a matter of spiritual retreats and going on soul-searching journeys and having shamans take you on ayahuasca retreats and things like that. It’s not about that at all. It’s the first time you come to a hard decision in your career or life, make the hard decision, see how good you are at making tough calls, and then keep doing that and meaning-making will take care of itself.”

To call meaning-making essential is not stepping out on a limb, unless you’re a nihilist.

Rao makes a bolder claim — looking for meaning is “intensely practical.”

A lot of people don’t get this. If you look at conversations about meaning-making in the abstract…listening to podcasters and getting radicalized, that level of conversation about the meaning crisis, it seems like a philosophical spiritual problem that should be addressed with religion and philosophy, ideas and so forth. It’s not. It’s really as simple as meaning-making is unlocked when you first learn to take courageous decisions and keep doing that, so it becomes a habit.

Connecting dots…when meaning-making is unlocked what actually changes for you?

You acquire an earned sense of agency as opposed to the illusion of agency that “tragic luck” furnishes. This requires being rugged now and again. Any rugging worth a lesson, means you took a real risk.

And I think yes, that is a learnable, teachable skill, but it’s one that the industrial environment with schooling and the paycheck world is actually anti-optimized for. It’s designed to teach you exactly the opposite of that. It’s designed to take you from an naive starting point and keep you tragically lucky for the rest of your life. And if they fail at it, you’re tossed by the wayside. That’s what the industrial world is set up to do, make you tragically lucky or throw you into the garbage heap.

Rao, coming around the bend with the baton, is arguing that our sense of agency is stunted by an institutionally enforced “narrow band of risk”. When I rummage through my feelings about education I come to a similar conclusion — the purpose of education is to bootstrap a sense of agency.

I’ll let one of my favorite education writers Matt Bateman take the baton for the last leg.

From Vocational Training For The Soul:

In the 20th century, there are two distinct rationales for education: vocational and characterological. Putting aside how well education actually does at getting you a better job or helping you become a better person or citizen, the idea is that the core of schooling should do both.

The most obvious place to look for the economic upside of an education is in the three Rs: writing, reading, and math. There are questions as to whether the specific math that students learn is optimally practical—should it instead emphasize, say, statistics, or personal finance, or maybe even spreadsheets?—literacy and numeracy are deployed throughout the economy and do indeed comprise an unambiguously useful part of education.

Literature, history, and the arts all fall under the heading of soulcraft. Even science, the practical driver of the modern world, is not that useful as you learn it in school. A small minority of students deploy their scientific knowledge in their careers, and those that do get specialized training far beyond what you get in K-12. These things are meant to prepare you for appreciation of or participation in the human project in a non-vocational way.

These divisions are very much alive today, as people struggle to find a coherent view of what our largely dysfunctional education system is supposed to accomplish. Some criticize education for not providing more economic upside, arguing for a more practical education, shorn of classical trappings. Others defend the humanistic value of education and argue that we should spend more time on non-economic upsides. This debate cuts across K-12, higher education, and even early childhood education.

Is there a way to transcend these divisions? Is there a way to get a handle on the vocational value of education that integrates its humanistic elements, rather than downplaying or siloing them?

It is commonplace today for a person to be profoundly alienated from the entire domain of work. This is not a Marxist critique about owning one’s labor, nor an aristocratic pining for a life of leisure. It is an observation that, for many people, work is a source of bitterness, not dignity. A seemingly small subset of people find meaning in work, and the rest fail to “find their passion”—a notion that is likely part of the problem—or simply resent work in a more general way.

While we still speak here and there of the value of a work ethic, the “ethic” part of this is, for us, obscure. We do not naturally see one’s personal relationship to work as a major moral issue. But it is one: the people who manage to find meaning in work are not the lucky few who land the good jobs, but the good who manage to build their souls in a certain way.

Education should offer more general value than the skills acquired on the job or in vocational training—but that general value, the soulcraft aspect of education, is not vocationally inert. It can and should nurture the beliefs and virtues associated with a life of work.

Bateman goes on to explain 4 practical ways to nurture such soulcraft. My favorite animates knowledge by linking it to actual humans. This is important (in my opinion) because without narrative disjointed ideas might as well be trivia.

  • The content of education should place more emphasis on the biographies that underlie it. There is no item of knowledge in education that is not the result of the work of some past human.

My second favorite:

  • We should allow opportunities for real work where possible. This is especially true of older adolescents, who can get jobs—from the entry-level to technical, depending on the teen’s skills and circumstances. But scaffolded opportunities can be provided for younger adolescents and elementary students to experience the reality, even the economic reality of work.

The inert child who never worked with his hands, who never had the feeling of being useful and capable of effort, who never found by experience that to live means living socially, and that to think and to create means to make use of a harmony of souls; this type of child… will become pessimistic and melancholy and will seek on the surface of vanity the compensation for a lost paradise.

And thus, a lessened man, he will appear at the gates of the university. And to ask for what? To ask for a profession that will render him capable of making his home in a society in which he is a stranger and which is indifferent to him. He will enter into a society to take part in the functioning of a civilization for which he lacks all feeling.

Maria Montessori

Moontower #187

Friends,

In Wednesday’s Munchies, I pointed you to Venkatesh Rao’s brain-expanding interview on Infinite Loops. One view I’m still marinating on is how finding a sense of meaning is not “a matter of spiritual retreats and going on soul-searching journeys and having shamans take you on ayahuasca retreats and things like that. It’s not about that at all. It’s the first time you come to a hard decision in your career or life, make the hard decision, see how good you are at making tough calls, and then keep doing that and meaning-making will take care of itself.”

To call meaning-making essential is not stepping out on a limb, unless you’re a nihilist.

Rao makes a bolder claim — looking for meaning is “intensely practical.”

A lot of people don’t get this. If you look at conversations about meaning-making in the abstract…listening to podcasters and getting radicalized, that level of conversation about the meaning crisis, it seems like a philosophical spiritual problem that should be addressed with religion and philosophy, ideas and so forth. It’s not. It’s really as simple as meaning-making is unlocked when you first learn to take courageous decisions and keep doing that, so it becomes a habit.

Connecting dots…when meaning-making is unlocked what actually changes for you?

You acquire an earned sense of agency as opposed to the illusion of agency that “tragic luck” furnishes. This requires being rugged now and again. Any rugging worth a lesson, means you took a real risk.

And I think yes, that is a learnable, teachable skill, but it’s one that the industrial environment with schooling and the paycheck world is actually anti-optimized for. It’s designed to teach you exactly the opposite of that. It’s designed to take you from an naive starting point and keep you tragically lucky for the rest of your life. And if they fail at it, you’re tossed by the wayside. That’s what the industrial world is set up to do, make you tragically lucky or throw you into the garbage heap.

Rao, coming around the bend with the baton, is arguing that our sense of agency is stunted by an institutionally enforced “narrow band of risk”. When I rummage through my feelings about education I come to a similar conclusion — the purpose of education is to bootstrap a sense of agency.

I’ll let one of my favorite education writers Matt Bateman take the baton for the last leg.

From Vocational Training For The Soul:

In the 20th century, there are two distinct rationales for education: vocational and characterological. Putting aside how well education actually does at getting you a better job or helping you become a better person or citizen, the idea is that the core of schooling should do both.

The most obvious place to look for the economic upside of an education is in the three Rs: writing, reading, and math. There are questions as to whether the specific math that students learn is optimally practical—should it instead emphasize, say, statistics, or personal finance, or maybe even spreadsheets?—literacy and numeracy are deployed throughout the economy and do indeed comprise an unambiguously useful part of education.

Literature, history, and the arts all fall under the heading of soulcraft. Even science, the practical driver of the modern world, is not that useful as you learn it in school. A small minority of students deploy their scientific knowledge in their careers, and those that do get specialized training far beyond what you get in K-12. These things are meant to prepare you for appreciation of or participation in the human project in a non-vocational way.

These divisions are very much alive today, as people struggle to find a coherent view of what our largely dysfunctional education system is supposed to accomplish. Some criticize education for not providing more economic upside, arguing for a more practical education, shorn of classical trappings. Others defend the humanistic value of education and argue that we should spend more time on non-economic upsides. This debate cuts across K-12, higher education, and even early childhood education.

Is there a way to transcend these divisions? Is there a way to get a handle on the vocational value of education that integrates its humanistic elements, rather than downplaying or siloing them?

It is commonplace today for a person to be profoundly alienated from the entire domain of work. This is not a Marxist critique about owning one’s labor, nor an aristocratic pining for a life of leisure. It is an observation that, for many people, work is a source of bitterness, not dignity. A seemingly small subset of people find meaning in work, and the rest fail to “find their passion”—a notion that is likely part of the problem—or simply resent work in a more general way.

While we still speak here and there of the value of a work ethic, the “ethic” part of this is, for us, obscure. We do not naturally see one’s personal relationship to work as a major moral issue. But it is one: the people who manage to find meaning in work are not the lucky few who land the good jobs, but the good who manage to build their souls in a certain way.

Education should offer more general value than the skills acquired on the job or in vocational training—but that general value, the soulcraft aspect of education, is not vocationally inert. It can and should nurture the beliefs and virtues associated with a life of work.

Bateman goes on to explain 4 practical ways to nurture such soulcraft. My favorite animates knowledge by linking it to actual humans. This is important (in my opinion) because without narrative disjointed ideas might as well be trivia.

  • The content of education should place more emphasis on the biographies that underlie it. There is no item of knowledge in education that is not the result of the work of some past human.

My second favorite:

  • We should allow opportunities for real work where possible. This is especially true of older adolescents, who can get jobs—from the entry-level to technical, depending on the teen’s skills and circumstances. But scaffolded opportunities can be provided for younger adolescents and elementary students to experience the reality, even the economic reality of work.

The inert child who never worked with his hands, who never had the feeling of being useful and capable of effort, who never found by experience that to live means living socially, and that to think and to create means to make use of a harmony of souls; this type of child… will become pessimistic and melancholy and will seek on the surface of vanity the compensation for a lost paradise.

And thus, a lessened man, he will appear at the gates of the university. And to ask for what? To ask for a profession that will render him capable of making his home in a society in which he is a stranger and which is indifferent to him. He will enter into a society to take part in the functioning of a civilization for which he lacks all feeling.

Maria Montessori

This week’s sponsor is PitBulls (myself, Tina and Steiner)!

PitBulls is the updated brand of StockSlam.

A large market-making firm is hosting PitBulls Sessions on May 17, 18, and 19 in Chicago. This is our 3rd series of doing these after NYC and SF. Come learn, have fun, and meet people with similar interests.

It’s totally free…and even better our host is always hiring!

  • You can learn more and apply here.
  • For some videos and context see: Mock Trading

Money Angle

I went on the Market Champions podcast with host Srivatasan Prakash (Spotify link) which was released this evening. Towards the end Sri asked me the old Richard Dennis turtle question (or Randolph and Mortimer framing if you prefer)…are traders born or made?

Look, I’m encouraging people to come to Pitbulls in May to learn how to think about trading and decision-making because I think these are teachable skills. But the proper answer is “it depends”. You can listen to the interview for a fuller take but before asking the question it pays to define terms. “Trader” is a vague term. Portfolio managers fit the spirit of the word better than those titled “execution trader”.

[I remember interviewing at a large AUM stock-picking fund in the mid-2000s for an execution job. I had a friend at the fund who got me the interview. When I was rejected I circled back and asked my mole what the problem was — “they knew you’d be bored.” The job was more formulaic than what I was doing. Meanwhile, I was pissed because the job would have paid about 2x what I was making at SIG which should remind you that beta pays a lot more than arbitrage. Sorry nerds, but on average, you skim more off the top knowing which side of the plate a fork setting belongs than knowing an exchange’s rebate tiers.]

Trading is a broad job description and it’s more of a team sport than commonly portrayed. Yet regardless of what criteria you choose to classify it, the most satisfying version of it is when it’s creative. Delightful puzzle-solving especially under live fire where the stakes aren’t life and death — just money. For some types of people, this is a deeply attractive way to spend your day (although I’d warn you that a lot of time it’s rote and boring — soldiers, firefighters, poker pros — it’s a lot of downtime, folding hands and waiting punctuated by periods of action where instincts and muscle-memory matter more than intellect).

In the interview, I make this point with a unique trading scenario I encountered back in 2020 when oil prices went negative. It involved several relative value dislocations between USO (an ETF that holds oil futures), oil futures, and the options on each.

In general, the model to price the relative value between options on USO vs futures options requires creativity and detailed thinking. But when oil went negative several new dislocations announced themselves — and if you were a paint-by-numbers trader then some of the dislocations were actually a trap. If you think more like a financial hacker, it was an opportunity. But you had to be quick — napkin calculations over intricate models.

If the puzzles of financial hacking interest you read ahead.

Money Angle For Masochists

The Setup

You are a trader specializing in making markets in oil futures and related derivatives. Your tradeable universe includes:

  • listed on oil futures
  • listed oil options
  • an ETF that holds front-month oil futures (like USO)
  1. The market closes. You observe the following facts:
    notion image

    The ETF share price closes at $6.00, in line with its NAV.

  1. You walk into the office the next day. All of the prices and facts are unchanged. However, you notice: The 0-strike put on the futures is $1.00 bid! You scratch your head. The zero-strike put has a bid?? Understanding that markets don’t present free money so easily, you come to the most likely explanation — oil futures can go negative!

Now the fun begins.

The following questions will slowly help you identify what opportunities might exist. I’ve provided hints that become increasingly strong so if you want to challenge yourself don’t rush for help too soon.

To continue:

Financial Hacking: ETF vs Negative Oil Futures

Note: If you are interviewing a junior or mid-level trader this might inspire some new questions.


From My Actual Life

Something I recently started doing that might be of interest to parents:

I’m reading “Journey to the Center of the Earth” by Jules Verne to my almost 7-year-old.

Written in the 1800s, the writing style is challenging.

So I read a bit, then I “translate” it into a more natural language for him. I’ve explained to him that if he reads the books he’s able to read and I read this book to him (instead of him trying to read it himself, which he was trying to do, but I have zero confidence he’s understanding), the combination will give him “magic.” I try to create some mystique around reading because I want him to think reading gives him special powers. Because that’s a fun thing to think, of course (and we probably should think about more things in such ways because it helps us notice the joy in being alive and stuff).

One of the chapters ended in a particularly suspenseful way. And I tried to explain the concept of suspense to him (to his and his teacher’s credit, he mentioned that when they read in school, they pause to try to predict what will happen next in the story).

So with the idea of suspense established, I just asked him to come up with suspenseful sentences. I’ve never asked him to do that, and he didn’t reply with anything substantive, but that’s okay, whatever… (I did give him an example: “The boy thought he locked the door, but then he saw the knob turn,” and my son goes, “that would freak me out,” and since this was just before bed, I felt a bit guilty..oops)

Just sharing for other parents’ benefit, I think we all want to find ways to show the joy of reading and wanted to start showing him “techniques,” a word I asked Alexa to define for him. So he can identify the author’s “weapons” and so maybe one day he can use them when he writes.

Stay groovy

☮️

Venkatesh Rao On Infinite Loops

Introduction by Infinite Loops host Jim O’Shaughnessy:

Venkatesh Rao is a writer, consultant, and author. He has been writing about indie consulting for years and has recently published The Art of Gig, Volumes 1 & 2, which together take an in-depth look at the gig economy.

Venkatesh joins the show to discuss tragic luck, becoming slightly nonsensical, the advantages of mediocrity, and a whole lot more!

My intro:

Venkat is one of my favorite writers. I pulled a number of ideas out of this interview for posterity. This is not a summary, just things I want to keepsake.

Episode link

[All bold is mine]


  • I had an equal number of people calling me a communist and a capitalist. – Venkat

I loved this line for the same reason I love this quote by Niels Bohr:

“How wonderful that we have met with a paradox. Now we have some hope of making progress.”

  • On Arthur C. Clarke’s distinction between a failure of imagination vs a failure of nerve: Arthur C. Clark has this wonderful essay called Failures of Prophecy, I believe, and he talks about two kinds of failure in thinking about the future, failure of imagination and failure of nerve, and he makes the very interesting claim that the failure of nerve is, by far, the more important. A lot of
    people are extremely imaginative, they can take in the vast amount of confusing information in the world now and come up with very imaginative sort of interpretations and sense-making constructs. But very few people can look the confusing or mess of reality in the face and say, “This is actually the nervy, courageous thing to do,” And go against their instincts. And it’s easy to, I don’t know, spend as much time as you like on the fun imaginative stuff and never do a courageous thing in your life, whereas the nervy thing is kind of the hard thing to do. So that’s where that particular phrase came from.
  • “Paycheck people” The Paycheck People connection is, I guess, the industrial economy over a century, has created this gamified environment relating to work where it is easy to get through life never making a hard decision ever. So long as you’re smart and imaginative, you will always be valued, you’ll have a job, somebody will give you interesting problems to work on. If you have the right kind of imagination, maybe you’ll come up with good answers, but your courage is not routinely tested. And this, I think, was probably the case in most sectors in the, at least, developed industrialized world, and the paycheck economy in particular, until, I would say, the mid to late nineties when things started wobbling and the old certainties were really starting to unravel and it became clear that you could not go through life only being smart and imaginative and playing the game that was laid out in front of you because at some point, you had to make courageous decisions, and the paycheck world is not really set up to allow you to make courageous decisions.In fact, in the paycheck world, I would argue, courageous decisions are, generally, decisions that kind of break the gamification model of the world itself…. In the brief time I was paycheck employed for several years at Xerox, I dropped a few bombs, I made few bold decisions, but what was shocking was not that a few senior executives kind of spotted me and chose to sponsor me and back my decisions and help me take, I don’t know, risky decisions and risky projects, but the complete lack of reaction in the rest of the corporation, and this, I think, is generally true. It’s like it’s outside their frame of reference to understand risk at all. It’s like, all right, you make this narrow band of maybe very intelligent and imaginative decisions, but within an extremely narrow band of acceptable risk. And beyond that, risk-taking is for senior executives, weird people in the investing world, artists and creative types who live hand-to-mouth and are starving. Risk is not within the frame of reference for how to navigate the world. And I think that’s kind of why I relate the paycheck economy to kind of a structural failure of nerve, it sort of trains you to not have nerve, it trains you to survive without it, and I think there’s a cost to that over a long term.
  • The false sense of security in the paycheck world

    A lot of the sense of security in the paycheck world is a completely false sense of security. That security does not actually exist. It’s as risky as being a gig economy independent, it’s just that they manifest and structure themselves differently. And if you refuse to take risks for year after year, quarter after quarter, for years on end, you’re going to end up with lots of risks. So yeah, it blows up in your face.[Kris: this feels like another one of those failures of mental accounting. We have a “first order effect” myopia where we are sedated by a steady paycheck while the wild world evolves and the sociopathic forces that govern corporate life conspire at least subconsciously against you — unless you are also all-in on the corporate Hunger Games. The person who is not playing the game ruthlessly is the one quietly accumulating all the risk when they thought they were playing it safe] 

  • Is there a character type or archetype that tends to be more open to risk?

    This is a very interesting and complex question, and I think there are layers to it that are truly worth unwrapping…

    1. On privilege
      Some of the basic criticisms of risk-taking, especially from the liberal corner, it’s like, yeah, the people who look like they’re bold risk-takers, if you look at their background, you’ll often find that they come from privilege and the risk, subjectively, for them, is not actually that big. The marginal cost of a hundred thousand dollar risk is not the same if you sort of grew up in poverty and made that first hundred thousand dollars with painstaking hustle versus if that hundred thousand is just 1% of a very large trust fund you inherited.

    2. Psychological conditioning that leads you to have different perspectives

      Another interesting layer, and this comes up in the famous two marshmallow test, for example, which has been kind of discredited, but it’s interesting how it’s been discredited, where the original research claims that kids who were willing to wait for the researcher to come back so they could have two marshmallows instead of having just one marshmallow right now, they did better in life and future. And poking at that, some more recent research looked at the backgrounds of children who made the two kinds of different decisions, and it turned out that the kids who picked one marshmallow now, versus two marshmallows later, tended to come from less privileged backgrounds where the short-term environment was relatively stable, but the medium and long-term environments were so unstable that it was actually rational for them to say, the future is so uncertain, I’d rather take the one marshmallow now than risk this.And if you poke deeper, there was this research done, I think by Phil Zimbardo, he’s another person who’s gotten canceled for questionable research. But one of the interesting things he did were these tests to study time perspectives, was asking children to tell autobiographical
      stories, and it’s very telling. People who grew up in deprived environments tend to tell stories that span a day. People who grew up in more privileged environments tend to tell stories that span a lifetime. So a poor kid who grew up in the slum might say something like, I got up in the morning and went to the market and found, I don’t know, a sandwich or something. It’s a day-long story. And a rich kid might tell a story about how I’m going to go to college and study law and become president and everybody will love me and I’ll be famous.

    3. The subjective perception of the quality of the risk

      Let’s say you were bullied as a kid and developed an extremely strong fighting instinct. And in a particular situation where somebody might be very combative and another person might be very conciliatory, you take what looks to other people like a very risky decision to escalate a conflict and blow things up. And maybe that traces back to some, I don’t know, early childhood memories of fighting back against bullies
      or something like that. So to you, in that situation, psychologically, it could be the case that, even though there are lots of explicit risks, like saying something objectionable and potentially losing your job, the sort of utility of that outcome or disutility of that outcome is actually less than the disutility of challenging, say, very deeply repressed traumas and learned behaviors for dealing with those traumas.

      So I think the narrative people tell themselves of what the risk they’re taking actually means to them, is actually very different from what you might assume just watching a drama unfold from out there. So my point here is, the risk looks very different to the person taking it then it might to different spectators, and this is part of the other mind’s problem. Like, I’m in a meeting, somebody else is saying something very risky that might get them fired and I’m like, “I would never say that because if I put myself in their place, I would see the risks and utilities very differently.” But part of that is… There’s the seen part, which is explicit incentives which affect everybody like money, losing positions, jobs, and investments, but there are also internal psychological risks. Maybe I don’t have the traumas that could be badly exposed and brutalized if I did certain things that another person does.

Venkat reveals his system for dealing with the complexity:

I’ve gotten, I think, both more empathetic and more judgmental about this stuff…The way I like to phrase this is, I like to keep my psychology complex, but my moral judgment’s simple. It’s like, I can never quite put myself in your shoes and unpack the complex psychology of why you’re taking the decisions you are, but I am going to draw some hard lines in the sand and say, “All right, murder is wrong.” I don’t care how traumatized and messed up you were in your childhood or how murdering someone seemed to you, the less risky thing, as opposed to facing the consequences of some actions and drawing a line in the sand at murder is wrong, you’re infringing another person’s life. So I think that’s kind of the layers of how I think about this stuff.

So to your original question of how should we think about the distribution of risk and is there a genetic predisposition to risk-taking, I think the answer is probably yes. There are probably people who are fundamentally more, I don’t know, risk-positive, and more likely to just blow things up to see what happens. So there’s probably some genetic predisposition, but there are these layers of trauma management, behavioral conditioning, and circumstantial assets that create so much more context that, I would say, the genetic component, at least in modern conditions, is probably
almost a rounding error.

I don’t take extreme risks and I’m like somewhere in the middle. But I probably present as somebody who takes a lot more risks than I actually do, because, from my subjective perspective, the actions I take are not actually as risky as they appear. So I think that’s a big theme in a lot of my writing. I’ve written about it in a few places, but the risk that I think I’m taking is not the risk you think I’m taking.

  • Rationality as nihilism

    There’s a philosophical notion that rationality is actually an extremely nihilistic mode of cognition. An extremely rational approach to say scientific discovery and experimentation, science is a fundamentally nihilistic process. If you let it, it’ll tear apart any sense of meaning you have in the world from any source whatsoever. And this is true of any approach to thinking and decision-making that sort of draws inspiration from more scientific and rational approaches to decision-making. Which is, you define your terms of reference, you define the variables in play, you sort of make up mental models of how those things relate to each other, hopefully in a scientific spirit. So you kind of make sense of the world and understand how the world works. Then you kind of decide what you value and say, “I value this much, I value that that much.” There are constraints. And so you end up solving an optimization problem that there’s a natural progression from thinking of the world in rationalistic modes and being sort of rational and building your models of reality, to moving to synthesis and normative considerations through optimization problems. And what that leads to is seeing sort of life itself as an optimization problem where you are like, “All right, what’s my utility function? What are the weights on the different factors? How am I going to solve this cost function? If I have constraints in the picture, are they hard or soft constraints?So you kind of almost turn yourself into an automaton that’s trying to solve an optimization problem. And there’s a long story about why this happens, but this is basically a doomed process. It will lead nihilism. By the time you’re done solving your perfectly rationally formulated and pose the problem, and you maximize your utility function and say, “Hey, this is the most utility maximizing outcome and decision I could hope for, and I’m going to do X, Y, and Z, and I’ll live the optimal life,” you will find that what you’ve solved for is a completely meaningless life.

    It’s sort of this conundrum of complete rationality and optimization as an approach to decision making leads to completely valueless, but technically correct, utility maximizing outcomes. So it’s the whole economics idea of knowing the price of everything and the value of nothing. This is the manifestation of that.

  • How fixed point futurism allows you to break out of this nihilistic process of optimization

    The answer is, you actually have to start not from rationality, but from complete arbitrariness. It’s like, “I’m going to pick something utterly arbitrary. I’m not going to attempt to justify it.” You want arbitrariness in a completely… How do I put it? Artistic sense. It’s like, “I’m just going to declare that blue is my favorite color.” So that’s the kind of thing I mean by arbitrariness. And it’s amazing how often committing to this kind of arbitrariness actually kills nihilism inherent in otherwise rational postulates. And then you can be as rational as you want about everything else so long as you hold faster that one arbitrary commitment you’ve made, which is what I mean by fixed point futurism. And an example that’s on my mind right now, my wife and I, we are shopping around to buy a house for the first time. And it’s like that’s a classic rational optimization decision-making problem. You can make up a spreadsheet about buying houses with all sorts of attributes about property values, income taxes, property taxes, blah blah, blah. And you can lose yourself in this optimization problem of a million variables, and sort of get everlastingly trapped in this hell of trying to decide what your utility function is.But on the other hand, you can pick something arbitrary that is going to break you out of that. So for example, my wife is arbitrarily attached to the idea that she must have beautiful view, where either of the ocean or mountains or something like that. And that can be an optimization variable where you can talk about, “All right, how much view am I willing to give up for lower taxes or whatever.” But it can also be arbitrary. You can say, “I want a view of Mount Rainier,” and that’s an extremely arbitrary thing that can lock you in.

    It’s a little philosophical sleight-of-hand trick of turning a nihilistic process into a meaning-making process. It’s like now you’ve decided no matter what happens to the rest of the world and whether we are all doomed to die in a zombie apocalypse, you are going to make one thing true about the future.

    You’re going to be wearing blue shirts, you’re going to be staring up at the sky with a telescope, even if it means zombies are coming at you and you’re like killing them with the machete, right? That’s what I mean by fixed-point futurism.

  • If you’re mired in the “paycheck economy”, you may be in such a routine that more existential questions about meaning are ignored or not given space. How does Venkat think about this?

    Meaning I think is extremely strongly related to the first topic we were talking about, nerve versus imagination. I think meaning-making begins when you first take your first courageous decision in your life and then realize just how much agency you have. To what extent you are operating in a condition of learned helplessness in institutionalized environments. And the first time you sort of make a reach for a truly autonomous decision, despite the risks, you realize how much more opportunity there is to do so. And for me, the first time that happened was actually long before my leap into the gig economy, when I was unhappy with my first PhD advisor. And I made the decision that even if it’ll costs me my financial aid and I’m sort of adrift for a while, I’m going to break up with my PhD advisor and sort of go off in the wild for a while and find another advisor and new funding.And that is what I did. It was very sort of a tough decision. I quit that advisor, I lost my funding, I had to go off and work at a startup for a year. Then I came back, worked with another advisor I got along with better. But I think that flipped a switch in me where after that, solving for meaning became so easy and so much second nature because it’s not an intellectual problem. You don’t have to be smart to solve for meaning-making, you just have to be courageous. You have to do the tough and hard thing as opposed to the maybe intellectually complex but easy thing. So I think I’m a reasonably smart guy, but I think what unlocked meaning-making for me was that first choice to make a tough decision. And after that, it was brain-dead obvious to me. Anytime I came to a fork in the road, it’s like, “Yeah, this is obviously the more meaningful thing to do, so I’m going to do it.”

  • How the world obscures this

    I would say that today the world is set up in a way where it’s actually hard to learn this meaning-making trick except by accident. And one of the things that I think this growing conversation around the gig economy is doing, is sort of reinforcing the intense practicality of looking for meaning. A lot of people don’t get this.If you look at conversations about meaning-making in the abstract, the way talking heads talk about them and talking about lost voice, listening to podcasters and getting radicalized, that level of conversation about the meaning crisis, it seems like a philosophical spiritual problem that should be addressed with religion and philosophy, ideas and so forth. It’s not. It’s really as simple as meaning-making is unlocked when you first learn to take courageous decisions and keep doing that, so it becomes a habit. And after that, you kind of unlock this idea of fixed point futures and all these other little tricks become sort of self-evident. 

    Learning to make meaning is the most intensely practical thing you can do. It’s not a matter of spiritual retreats and going on soul-searching journeys and having shamans take you on Ayahuasca retreats and things like that. It’s not about that at all. It’s the first time you come to a hard decision in your career or life, make the hard decision, see how good you are at making tough calls, and then keep doing that and meaning-making will take care of itself.

    And I think that’s a lesson that the emerging conversation in the gig economy is driving home for a lot of people. And a lot of people who stay in the paycheck economy, stay in an environment that makes this way too hard, that tells them, “You have to go on spiritual retreats and read Zen philosophy and take drugs to learn meaning-making.” And it’s not that hard.

  • The “tragically lucky”

    At age 23, it’s very tempting to conflate agency and determinism in scripts. You think you control your future, you think you can make a very specific future happen. You think “I’m a smart guy, I have these resources at hand and I can solve the problem and solve the equation of how to turn my talents and resources into the outcomes I want.” And then of course, life hits you in the face. You realize it’s much more complex.Then you ask, “What happens next?” Do you then refactor your sense of agency as in “I still have agency, it just doesn’t work the way I thought it did, so I’d better get about understanding how the world actually works and understanding how agency actually operates.” That’s one path.

    The other path is of course the world sort of mashed my plans to bits and pieces and I’m going to be helpless from here on out, and that happens to people too.

    So I think a naive sense of youthful agency does not survive first contact with the enemy…but for some people it does. And of course, there are also people who just get lucky in a very naive sense in the sense that they plan a particular future and actually it unfolds because they never get hit in the face with conflicting reality. So there are people I know who are these spirits who go through life everything having gone exactly as they planned.

    But there’s a certain tragedy there, which is, they think they’re super agenty then things go out exactly as planned and they become president or whatever, and then they’re like 60, 70 or these old people and they come across as children. I talk to them and they’re like, there’s a sense of a lost child about them. It’s like they were never really tested by life, so they’d never really actually learned what was going on. It’s like they’re 60 or 70 and they act like children or 23-year olds maybe. And part of the reason is they were on the surface, they were super lucky that things bent as they planned, but at the deeper sort of philosophical level, they’re the most intensely tragic figures in the world because things went exactly as they planned. The most interesting thing that can happen to you in your life is things don’t go as you plan. And because that forces you to come to terms with what’s the actual nature of the world, what’s the actual nature of agency.

    [Kris: I think most people’s desire or goal in life is to become tragically lucky. Ignorance is bliss and all that. Hard to think of anything more boring.]

  • Finding a healthy sense of agency

    2 versions of the problem

    a) There are people who were so battered down by early life traumas that they never make those naively optimistic 23-year old statements at all.

The first challenge is to get them to that place of naive optimism in the first place. So I think of that as a much more basic challenge of humane treatment of young people, which is if they’ve been battered, just create kind environments for them where they can develop some confidence and say, “Hey agencies, actually I think that exists”, even if it’s at a very toy level. So often when I’m thrown into position of trying to mentor younger people, which I try to avoid, I’m not a mentor type person, but when I am thrown in the situation, my tendency is to ask “how burned are you? How much are you a devastated landscape of bad parenting and bad childhood conditioning that we have to get you to the starting line of being a naive optimistic age 20?” And this requires kindness and nurturing, and I’m not very good at that, other people are better.

b) But let’s assume some people are already at that starting line of naive optimism

How do you ensure that you when throw them into reality a) they don’t get tragically lucky. Let’s hope they don’t get tragically lucky. Throw them in something that actually challenges their assumptions about the world and breaks them in some way. But then how do you ensure that if they’re broken, they’re actually not going to react with complete helplessness, but then sort of pick themselves up and say, “No, the world works differently and I’m going to rethink what agency means.”

And I think yes, that is a learnable, teachable skill, but it’s one that the industrial environment with schooling and the paycheck world is actually anti-optimized for. It’s designed to teach you exactly the opposite of that. It’s designed to take you from an naive starting point and keep you tragically lucky for the rest of your life. And if they fail at it, you’re tossed by the wayside. That’s what the industrial world is set up to do, make you tragically lucky or throw you into the garbage heap.

In the developing world, more people are thrown by the wayside, and in places the US more people enjoy the tragically, enjoy is the wrong word, but suffer the tragically lucky outcome.

We don’t want either of those outcomes. We want you to be thrown into the world, into a test environment where you’re
actually tested and then you kind of learn the skills through trial and error of acquired realistic agency

  • The self-defeating fear of technology

    Go back as far back as you like in tech history. And you will always find that it’s the case that whenever tech sort of automates or disrupts a category of labor, it creates 10 times more new kinds of labor, right? So we feed the entire planet with maybe 4% of modern populations in agriculture. It used to be 80 plus percent a couple of centuries back, but we produced more food and feed everybody. And it’s not that all those farmers banished. Future generations just weren’t farmers anymore. There was no need for them to be farmers. So in one sense, it’s true. If you’re attached to your idea of yourself being a farmer or a creative writer who’s going to get disrupted by LLMs and you’re attached to that idea, you are going to go obsolete. So your expectation is, in fact, tragically correct. You are going to be extinct. But the question is, “Why are you choosing that path of extinction?” I think the reason is that these people like the character in Office Space who says, “I’m a people person,” they’re actually the most degenerate sort of lesser subhumans in our world, because it’s kind of weirdly dumb to live as part of a species that’s been a technological species for 6,000 years and reject this hugely important aspect of our environment that’s been growing for 6,000 years, right? Saying, “I’m a people person,” and sort of distancing yourself from the world of technology that you’re completely entangled with is like I translate it as saying, “I choose to be a 10th of what a human being actually is.” So yes, the thing is it’s not the technologies or tools or that we are sort of masters of our technology, that we use technology as tools, but that we co-evolve with them. The medium is the message, and we are inextricably entangled with our tools… what tools you sort of came of age with… I’m as much a product of my human conditioning environment, my parents and my friends and so forth, as I am a product of computers and various other technological artifacts through which my brain became what it is today, and that process kind of continues.

  • The key to playing infinite games: mediocrity

    I would say, my least popular idea ever, and therefore, my absolute favorite idea ever, which is this call for mediocrity. I have a whole series on my blog about mediocrity and how I love mediocrity and how I solve for mediocrity and I hate excellence. And finally, it’s just me being a troll and a contrarian in this culture of excellence and trying to win and 4.0s and being excellent and Six Sigma and optimizing and all that whole world of being Paycheck People. This is why the term Paycheck People evokes a whole world of stuff. They are people who play finite games. They do all these things. But yeah, how do you get away from that? Be mediocre. I think I got onto this line of thinking starting with David Allen, the author of Getting Things Done. I got friendly with him in 2005 or 2006. I met him a couple of times. Lovely guy. In his workshops on Getting Things Done, he starts off with a very good joke, which is, “How do you get things done? I’m going to give you an absolutely perfect hack. Lower your standards.” I love that. And he doesn’t mean it flippantly. A lot of people assume he’s just making a joke, and the rest of the workshop is about, “All right, how not to lower your standards and how to actually maintain high standards and do it.” No, David means it. He means fricking lower your standards.This, I think, is an unbelievably important key to unlocking infinite game attitudes, because the conceptual connection is optimizing in a finite game and trying to win by particular standards and maximizing according to those standards means you’re operating in a closed universe of sort of contextual information and you’re ignoring everything outside of that. And the infinite game is fundamentally about recognizing the fact that there is an infinite universe out there beyond the little scope of a little game you’ve set yourself to play, and there is no such thing as ultimately winning or losing in that little fake game you’ve made up. All that happens is that you either win or you don’t. And then you sit back and say, “All right, life hit me in the face or made me tragically lucky.” So I think winning in a finite game is tragic luck, losing in a finite game is life hitting you in the face.

    But then what happens next? You’ll sit back, let that boundary dissolve, expand your horizons and say, “All right, what else is out there in the universe? What else is out there beyond the scope of this game that I was just in, that I can pay attention to a,” I don’t know, “new fixed point that I can sort of latch onto and create a whole new game around?” That’s how you continue the game, right?The way to do this is to let go standards. The way to do this is to appreciate that mediocrity is the key, which is when you’re in any given finite game, you don’t go all out. You reserve a part of sort of your human potential for just paying attention to peripheral vision, the world outside the little particular game you happen to be playing. Of course you play it sincerely. And ironically, you do right by commitments you’ve made to other people. If you say you’re going to do a job and other people are depending on you to do that, you do that. So I’m not saying cut your standards in the sense of being unethical or unreliable or anything like that. I’m saying maintain a reserve of who you are, your thinking, and devote it to the infinite universe beyond the particular game you happen to be playing. That looks, from the context of the game, kind of like mediocrity. It kind of looks like you’re not willing to go 110% and hustle and go all out and stuff like that. It looks like, at some level, a part of you is philosophically checked out because it’s curious about the rest of the universe. It’s not checked out because you’re lazy or lack courage or insufficiently committed. You’re checked out because you’re bigger than the particular thing you happen to be doing right now. You’re a larger being that has a bigger faith in your life, and you want to reserve a part of your attention to that. And there’s a strong evolutionary logic to that.[Kris: the logic is basically how slack or redundancy in nature gives the randomness embedded in evolution to be expressed.]

    This is why success can be so tragic for people who’ve been overcommitted to it. It’s like you’ve actually won and you’re acting devastated and destroyed, like the meaning of your life has been rugged from you. The rug has been pulled out from under your feet. That’s because you overcommitted. You had too high of a standard.

  • Divergentism

    As people grow and age, they fundamentally diverge from each other in thought space, and that’s okay. It’s okay to not be understood, because that’s what happens when you diverge from other people. It’s like people don’t understand you as well, and you don’t understand them as well. So I would say the compact form of the thought is it’s okay to not be understood and to not understand other people.

    [Kris: I’ve had a similar thought. When people are surprised by others my response is always…”there are 8b people in the world”]

Insights From The Warrant Puzzle via Financial Hacking

Ok nerds, I made it easy to drill down into the topics. Obviously, buy the book if this is useful.

It’s hard to pick one of these to explore here, but I’m going to go with the warrant one for 3 reasons:

  1. If you are unfamiliar with warrants (I never traded them myself) you’ll acquire basic background knowledge.
  2. The “devious” part of the puzzle is a great test of your arbitrage-goggles.(Totally self-serving comment but I did get the right answer to this puzzle as well as most of the questions in the book — when you don’t spend your days in the mines anymore you worry about how rusty you are getting so the check-up is nice.)
  3. I weaponized the logic of the puzzle’s solution — it’s implicitly a proof that “selling calls is not income”!

I’ll get you started here.

The setup:

Warrants are just call options issued by the company itself (as opposed to a call option written in a listed market by an arbitrary counterparty).

Imagine 2 identical stocks. One with a call option outstanding and the other with a warrant outstanding. These respective derivative contracts have the same exact terms (expiration date, expiration style, etc) and the stocks themselves have the same attributes but are distinct entities. This is not a trick — you can accept the assumptions — the terms of the contracts and the behavior of the 2 different stocks is identical.

Question 1: What is worth more — the call option on Stock A or the warrant on Stock B?

Then the more “devious” version”

Question 2: What if a single company has both a warrant and call option (again identical terms) outstanding…which is worth more?

You can find the answers to the questions as well as my case for how this proves that “selling calls for income” is a nonsense statement. [In that explanation, you will also have more mental foundations shaken when you start to consider the ramifications of “implied delta”]

🔗 https://notion.moontowermeta.com/the-warrant-puzzle

I’ll mention one more thing that doesn’t have to do with the book. Again, this concept of “selling calls for income”. If you overwrite calls each month on a stock you own you are doing something very similar to just selling a portion of your position every month. If you own 100 shares of X, and you sell a .20 delta call, you theoretically liquidate 20% of your position. It may not feel like that because usually the calls expire worthless but look at 2 approaches:

Strategy #1: You sell 20% of your holdings a month instead of selling calls

Your position shrinks by 20% each month. In 10 months your position is .80¹⁰ or 10% of what you started with. Zeno’s paradox aside, in about a year you are out of your position.

Strategy #2: You overwrite .20 delta calls every month

Most months you keep the call premium, approximately 1 in 5 months, your entire position gets called away.

The relative performance of the 2 strategies is going to depend on the volatility and path of the stock!

[This is a significant insight to noodle on by the way]

It’s tempting to think “well if I get assigned on those .20d calls less than 1-in-5 times then I’m selling the calls for more than they are worth”.

Sorry. That’s not the full test.

Just think of the scenario where you sell 20% of the holding instead of selling the call option — then the stock drops to zero. You will never have been assigned on your call but that call-overwriting strategy will have much worse results than the “sell a portion of your holdings” strategy. And what did the performance disparity depend on? The volatility.

I know it’s hard to believe — but calls are puts and puts are calls and this demonstration didn’t rely on the put-call parity formula to make the point. Mayim gives an intuitive proof of p-c parity as well.

Generalizing

Stocks that pay dividends are the equivalent of strategy #1 (although on a much smaller scale since dividends are closer to 2% than 20%). If the stock didn’t pay a dividend you can create your own by just selling a portion of your holdings. The same logic holds for selling calls.

That there is a whole asset management sales-machine that revolves around call-selling and dividend-paying stocks obscures the reality that the economics are pretty similar (taxes are a central difference). That a company making $10 in earnings might retain/reinvest it instead of paying it is an overrated distinction.

[After all, once a company pays a dividend, the stocks drops by the amount of the dividend since its assets fall by the cash amount. This is literally why you exercise in-the-money call options early — the stock is going to drop and you need to own the shares to receive the dividend that compensates the call holder for share decline.

Mayim even uses this point in a separate context — to show that even spot prices are forwards! This is a more important point for arbitrage traders than investors — a handful of readers might recall a nefarious strategy of picking off stock specialists by requesting a different settlement date than the standard T+3 ahead of a special dividend. This strategy ended up in court. I’ve always thought those extreme couponers who read fine print as a form of offense would enjoy high-finance shenanigans. I see such cleverness as Moloch embodied — when you actively hunt for the limit of where the spirit of a law gives way to the letter you take the free-rider problem and make it a feature for personal gain. Congratulations on your yacht, I guess.]

The Sympathizer

There’s this thing called “content brain” that you get when you write online.

Thomas Bevan explains:

You develop content-brain as each day you spend you peak creative energy feeding the algorithm the bite sized chunks of easily digestible nonsense that it craves.

You degenerate from essays and paragraphs down to fortune cookies and quotations.

[Kris: the mechanism conjures the still-fresh-on-my-mind reading of Amusing Ourselves To Death]

Rather than actually writing you merely write about writing. You become a commentator rather than a practitioner.

I’m as guilty as anyone. And if you want to give me lashes, I’ll even provide the whip — see my old post The Literary Version Of A Chart Crime.

Despite the justifiable negative characterization, “content brain” is also a filter. Its most refined expression in financial writing is story-mining history to explain some evergreen concept in a memorable way. At the same time there’s a dangling sense that you can see the string suspending the magician’s levitation act. The more skillful the writer the less visible the string.

While I was in Vietnam I had to suppress many urges to intellectualize the experience for the purpose of talking about it here. And then several people told me they look forward to me writing about it.

Well, I’m going to disappoint them.

Why?

  1. I actively didn’t want to be in my head. I told myself I didn’t want to “find the insights” in the experience. I just x’d out the FindInsight.exe window that auto-boots when I do something novel. Partly in the name of being present but mostly because I don’t have the chops to give Vietnam and its people the words they deserve.
  2. I read Viet Thanh Nguyen’s The Sympathizer (Khe texted me to recommend it when he noticed I was in Saigon). You are better off reading 1 sentence from Nguyen than a blog article from me.

So to that end:

For the theatrically inclined:

Here’s the trailer for the 2024 release of a series of the show on HBO MAX. Robert Downey is one of the stars. I’ll take the liberty of making one connection here — in The Sympathizer there’s a theme of “representation” and the book’s protagonist is cast in a dilemma of how to influence a film made about the Vietnam War, an unsubtle reference to Apocalypse Now, and its choice of actors for Vietnamese roles.

In the tongue-in-cheek film Tropic Thunder, Downey’s character does the blackface thing in the name of method-acting but the movie is in on the self-skewering joke. In the series adaptation of The Sympathizer, Downey does the Eddie-Murphy-plays-lots-of-chacters-thing.

I willfully decided this is not an accident. I’m giving Downey massive props for commitment to a highly meta display of satire that breaks the container from a single film and lands an impressively drawn-out professional wink.

Moontower #186

Friends,

There’s this thing called “content brain” that you get when you write online.

Thomas Bevan explains:

You develop content-brain as each day you spend you peak creative energy feeding the algorithm the bite sized chunks of easily digestible nonsense that it craves.

You degenerate from essays and paragraphs down to fortune cookies and quotations.

[Kris: the mechanism conjures the still-fresh-on-my-mind reading of Amusing Ourselves To Death]

Rather than actually writing you merely write about writing. You become a commentator rather than a practitioner.

I’m as guilty as anyone. And if you want to give me lashes, I’ll even provide the whip — see my old post The Literary Version Of A Chart Crime.

Despite the justifiable negative characterization, “content brain” is also a filter. Its most refined expression in financial writing is story-mining history to explain some evergreen concept in a memorable way. At the same time there’s a dangling sense that you can see the string suspending the magician’s levitation act. The more skillful the writer the less visible the string.

While I was in Vietnam I had to suppress many urges to intellectualize the experience for the purpose of talking about it here. And then several people told me they look forward to me writing about it.

Well, I’m going to disappoint them.

Why?

  1. I actively didn’t want to be in my head. I told myself I didn’t want to “find the insights” in the experience. I just x’d out the FindInsight.exe window that auto-boots when I do something novel. Partly in the name of being present but mostly because I don’t have the chops to give Vietnam and its people the words they deserve.
  2. I read Viet Thanh Nguyen’s The Sympathizer (Khe texted me to recommend it when he noticed I was in Saigon). You are better off reading 1 sentence from Nguyen than a blog article from me.

So to that end:

For the theatrically inclined:

Here’s the trailer for the 2024 release of a series of the show on HBO MAX. Robert Downey is one of the stars. I’ll take the liberty of making one connection here — in The Sympathizer there’s a theme of “representation” and the book’s protagonist is cast in a dilemma of how to influence a film made about the Vietnam War, an unsubtle reference to Apocalypse Now, and its choice of actors for Vietnamese roles.

In the tongue-in-cheek film Tropic Thunder, Downey’s character does the blackface thing in the name of method-acting but the movie is in on the self-skewering joke. In the series adaptation of The Sympathizer, Downey does the Eddie-Murphy-plays-lots-of-chacters-thing.

I willfully decided this is not an accident. I’m giving Downey massive props for commitment to a highly meta display of satire that breaks the container from a single film and lands an impressively drawn-out professional wink.


A Little Help

I could use some help for someone dear.

Do you know of any FP&A recruiters or jobs? I know a fantastic person looking. She has 20+ years experience.

(Bay Area based or remote preferred)


Money Angle

I managed to read 4 books during my trip — the Postman book, The SympathizerHow To Lie With Statistics — and one finance book.

And it’s f’n awesome:

Financial Hacking by Philip Maymin.

I wish I wrote this book. The approach is deeply familiar and resonant — build intuition by tinkering. Since my formal math education pretty much stopped in 12th grade, I had to build intuition for derivatives instead of relying on formulas and proofs.

  • The book is a fun read. The tone is conversational — Maymin is talking directly to you. The book is casual. Loaded with quotes from pop culture (esp the Simpsons) on nearly every page.
  • The question-and-answer tempo is engaging and highly reminiscent of workflow on a trading desk. A recurring trope is “your boss just said X, how do you respond assuming you don’t have time to come up with a formal presentation”
  • While the references to Mathematica might feel dated, the logic is easily transported to Python or your tools of choice.
  • I would make this book mandatory reading for someone who has completed a basic finance rotation and has a few months of live trading under their belt. It’s also a great refresher for seasoned traders — especially if you are preparing for an interview.
  • You’ll get the most out of this book if you engage with the questions actively. In fact, I’d use this book as a source of interview questions for mid-career traders.
  • A practical argument for the “financial hacking” approach:
    • build intuition so that we can quickly gain deep understanding of even brand new products, faster than the competition. To that end, we don’t look to find delicate new pricing formulas, but rather rigorous and useful ways of looking at the problem… If you think of the timeline involved in new products, those who implement well-established pricing formulas are several years late to the party. Those who completely derive what will eventually become well-established pricing formulas are probably about a year late. The purpose of this book is to make you ready to be the first one to trade, when the new product just comes out, and its mispricing is likely at a maximum, or at the very least at its most volatile. It is in times like those that a prepared, flexible financial hacker and trader can pick attractive spots.
  • Once you have read the book, you may agree with my contention that this is the single most important statement in the treatise:
    • These kinds of practical issues are ignored in standard textbook discussions of riskless profit opportunities but they are precisely the issues that financial hackers worry about most. And you will almost surely never experience anything with this level of certainty at any time in your career [referencing a trade where you are given the outcome]. There will always be doubts about your model, your inputs, and your forecast. According to standard theoretical concepts of arbitrage, none of those questions matters. According to real-world practical experience, you can’t even begin to trade until you have answered all of them.

Money Angle For Masochists

Ok nerds, I made it easy to drill down into the topics. Obviously, buy the book if this is useful.

It’s hard to pick one of these to explore here, but I’m going to go with the warrant one for 3 reasons:

  1. If you are unfamiliar with warrants (I never traded them myself) you’ll acquire basic background knowledge.
  2. The “devious” part of the puzzle is a great test of your arbitrage-goggles.(Totally self-serving comment but I did get the right answer to this puzzle as well as most of the questions in the book — when you don’t spend your days in the mines anymore you worry about how rusty you are getting so the check-up is nice.)
  3. I weaponized the logic of the puzzle’s solution — it’s implicitly a proof that “selling calls is not income”!

I’ll get you started here.

The setup:

Warrants are just call options issued by the company itself (as opposed to a call option written in a listed market by an arbitrary counterparty).

Imagine 2 identical stocks. One with a call option outstanding and the other with a warrant outstanding. These respective derivative contracts have the same exact terms (expiration date, expiration style, etc) and the stocks themselves have the same attributes but are distinct entities. This is not a trick — you can accept the assumptions — the terms of the contracts and the behavior of the 2 different stocks is identical.

Question 1: What is worth more — the call option on Stock A or the warrant on Stock B?

Then the more “devious” version”

Question 2: What if a single company has both a warrant and call option (again identical terms) outstanding…which is worth more?

You can find the answers to the questions as well as my case for how this proves that “selling calls for income” is a nonsense statement. [In that explanation, you will also have more mental foundations shaken when you start to consider the ramifications of “implied delta”]

🔗 https://notion.moontowermeta.com/the-warrant-puzzle

I’ll mention one more thing that doesn’t have to do with the book. Again, this concept of “selling calls for income”. If you overwrite calls each month on a stock you own you are doing something very similar to just selling a portion of your position every month. If you own 100 shares of X, and you sell a .20 delta call, you theoretically liquidate 20% of your position. It may not feel like that because usually the calls expire worthless but look at 2 approaches:

Strategy #1: You sell 20% of your holdings a month instead of selling calls

Your position shrinks by 20% each month. In 10 months your position is .80¹⁰ or 10% of what you started with. Zeno’s paradox aside, in about a year you are out of your position.

Strategy #2: You overwrite .20 delta calls every month

Most months you keep the call premium, approximately 1 in 5 months, your entire position gets called away.

The relative performance of the 2 strategies is going to depend on the volatility and path of the stock!

[This is a significant insight to noodle on by the way]

It’s tempting to think “well if I get assigned on those .20d calls less than 1-in-5 times then I’m selling the calls for more than they are worth”.

Sorry. That’s not the full test.

Just think of the scenario where you sell 20% of the holding instead of selling the call option — then the stock drops to zero. You will never have been assigned on your call but that call-overwriting strategy will have much worse results than the “sell a portion of your holdings” strategy. And what did the performance disparity depend on? The volatility.

I know it’s hard to believe — but calls are puts and puts are calls and this demonstration didn’t rely on the put-call parity formula to make the point. Mayim gives an intuitive proof of p-c parity as well.

Generalizing

Stocks that pay dividends are the equivalent of strategy #1 (although on a much smaller scale since dividends are closer to 2% than 20%). If the stock didn’t pay a dividend you can create your own by just selling a portion of your holdings. The same logic holds for selling calls.

That there is a whole asset management sales-machine that revolves around call-selling and dividend-paying stocks obscures the reality that the economics are pretty similar (taxes are a central difference). That a company making $10 in earnings might retain/reinvest it instead of paying it is an overrated distinction.

[After all, once a company pays a dividend, the stocks drops by the amount of the dividend since its assets fall by the cash amount. This is literally why you exercise in-the-money call options early — the stock is going to drop and you need to own the shares to receive the dividend that compensates the call holder for share decline.

Mayim even uses this point in a separate context — to show that even spot prices are forwards! This is a more important point for arbitrage traders than investors — a handful of readers might recall a nefarious strategy of picking off stock specialists by requesting a different settlement date than the standard T+3 ahead of a special dividend. This strategy ended up in court. I’ve always thought those extreme couponers who read fine print as a form of offense would enjoy high-finance shenanigans. I see such cleverness as Moloch embodied — when you actively hunt for the limit of where the spirit of a law gives way to the letter you take the free-rider problem and make it a feature for personal gain. Congratulations on your yacht, I guess.]


From My Actual Life

I initialized a social media escape pod: I’m moontower.bsky.social on Bluesky. I don’t have invite codes sorry. I’m not active there (yet).

Twitter might be frustrating but there’s plenty of community there. In fact, without me asking, just by conveying a story, I received over $500 in donations which Yinh and I matched for a neighborly cause.

The aftermath:

https://twitter.com/KrisAbdelmessih/status/1646898185254871040?s=20

(Twitter disabled embeds in Substack. “Take my ball and go home energy” is always a sign of strength. Right?]

Stay groovy ☮️