arbitrage is a hall of mirrors

Given where markets are these days, there are a lot of investors, often former or current employees and execs of Mag7 names that are sitting in large, concentrated position at a low cost basis.

In English, they’re as rich as celebrities but standing standing right next to you giving out Pocky on snack duty for 3rd grade soccer.

They are reluctant to sell because the tax hit is immediate. One possible solution to “have their cake and eat it too” is to stay long but collar the stock. This is typically presented as buying a put option financed by a covered call.

Here’s an example based on closing TSLA option prices on 1/28/2025 for the Jan 15th 2027 expiry (ie 717 DTE).

The stock closed around $396.65.

We can just round numbers, call it $400.

You can buy the 25% out-of-the-money put, the 300 strike, for about $56 and sell the 25% out-of-the-money call, the 500 strike, for about $108.

To be perfectly clear — you can buy the put for protection, sell the upside call and COLLECT about $52 or about 13% premium.

Think about the risk/reward for a moment.

If the stock drops $100 in 2 years you are stopped out at $300 but you collected $52 so your net loss is only $48 or about 13%.

If the stock climbs to $500, you will get assigned on the short call so you’ll make $100 on the long stock position but still get to keep the $52 premium for a total gain of $152 or about 38%.

In other words, you can stay long the stock but you get paid 3x what you lose on a $100 up move vs $100 down move.

It sounds like free money.

The prices come from option theory’s arbitrage-free (ie risk neutral) pricing.

This is a checklist of forces that seem to create the illusion.

✔️The forward price is actually $430

We know that because if you look at the option chain, despite the $430 call being ~ $33 out-of-the-money, it’s the same price as the 430 put which is in-the-money.

The reason for this is because if it didn’t you could put on a reversal or conversion trade to arbitrage the funding rate on the stock.

Think of it this way, if the 430 call cost $20 more than the $430 put you could sell the call, buy the put and collect $20. At expiry, since you are short the $430 synthetic stock you are guaranteed to sell TSLA at $430 (either you exercise the 430 put if it’s ITM or get assigned on the 430 call if it’s ITM). So you can buy the stock today for say $397 which would be a (mostly) riskless position since you are long the stock and short the synthetic. The cashflows would be:

  • Collect $20 on the synthetic (remember you sold the call for $20 more than the put)
  • Ensure a profit of $33 by expiry (you bought TSLA for $397 and will sell it at expiry at $430)
  • Forgo ~$32 interest on $397 for 2 years (assume 4% rfr)

Net arbitrage profit: +$21 in excess of funding costs!

If the 430 call traded $20 UNDER the put you would do the arbitrage in reverse. You’d buy the call, sell the put and be guaranteed to buy the stock for $430 at expiry. To hedge you would short it today at $397 and collect $29 on the cash in your account.

So at expiry you are buying the stock for $430 that you shorted at $397. Cash flows:

  • -$33 on buying TSLA synthetically and shorting it today
  • +$32 in interest on cash proceeds from the short
  • +$20 in option premium (remember, you sold the put $20 higher than the call you bought)

Net arbitrage profit: +$19 in excess of funding costs!

If the RFR is 4% (which it approximately is) then the 430 call and put must traded around the same price for there to be no arbitrage.

Therefore $430 is the 2 year at-the-forward strike.

✔️Despite both option strikes being $100 or 25% away from the spot price, the call is much “closer”

Part of this has to do with the forward being $430. Referencing the 430 strike the 500 strike is only 16% OTM while the 300 strike is now 30% OTM.

The option that is “closer” has a higher delta and worth more due to moneyness.

But the other reason comes from the fact that Black-Scholes assumes a lognormal distribution of returns (which is a positive skew distribution).

Why? If a stock is bounded by zero but has infinite upside the OTM call will be worth more than the equidistant OTM put. The distribution is balanced around a median stock expectation that is dragged lower by volatility (if you make 25% then lose 25% you are net down over 7%).

In TSLA’s case the 300 put has a -.20 delta while the 500 call has a .60 delta!

(TSLA also has an inverted skew — the call IV is touch higher than the put IV but that has a minor effect on the cost of the collar in the context of this discussion.)

Here’s a summary table including the collar price if the IV was the same for the 300 put and 500 call:

💡What this post “encompassed”

If you understand this post you have implicitly reviewed:

I called this post “arbitrage is a hall of mirrors” because no-arbitrage pricing theory created this situation where the risk/reward of the collar looks incredibly attractive.

Part of that is theory explicitly incorporates the opportunity cost (the risk-free rate) while our intuition tends to gloss over it. Opportunity cost is an easy topic to understand when someone explains it to them, but it’s trickier to apply in live decision-making scenarios. Look no further than rich people who clip coupons or drive 10 miles out of their way for Costco gas.

The output of arbitrage-pricing can be dissonant to our eyeball tests. It was one of my favorite topics to write about because it does feel so warped.

🟰Understanding Risk-Neutral Probability

This is my guide to the subject. It’s full of nested problems, Socratic method, and even financial theory as philosophy. I’ll re-print one of the nested sections:

👽Real World vs Risk-Neutral Worlds

No-arbitrage probabilities allow us to price options by replication

The insight embedded in Black-Scholes is that, under a certain set of assumptions, the fair price of an option must be the cost of replicating its payoff under many scenarios. Any other price offers the opportunity for a risk-free profit. Have you ever wondered why the Black Sholes “drift” term for a stock is the risk-free rate and not an equity risk premium (like you’d expect from another type of pricing model — CAPM) or the stock’s WACC? A position in a derivative and an opposing position in its replication is a riskless portfolio. Therefore that portfolio only needs to be discounted by the risk-free rate. Option pricing derived from a no-arbitrage replication strategy means we should use the risk-free rate to model a stock’s return.

‼️What seasoned option traders get wrong: Outside of the option pricing context, the risk-free rate is the wrong assumption for drift!

From Philip Maymin’s Financial Hacking:

One of the most common mistakes that even highly experienced practitioners make is to act as if the assumptions of Black-Scholes (lognormal, continuous distribution of returns, no transactions costs, etc.) mean that we can always arbitrarily assume the underlying grows at the riskfree rate r instead of a subjective guess as to its real drift μ. But this is not quite accurate. The insight from the Black-Scholes PDE is that the price of a hedged derivative does not depend on the drift of the underlying. The price of an unhedged derivative, for example, a naked long call, most certainly does depend on the drift of the underlying. Let’s say you are naked long an at-the-money one-year call on Apple, and you will never hedge. And suppose Apple has very low volatility. Then the only way you will profit is if Apple’s drift is positive; suppose Apple has very low volatility. Then the only way you will profit is if Apple’s drift is positive…if it drifts down, your option expires worthless. But if you hedge the option with Apple shares, then you no longer care what the drift is. You only make money on a long option if volatility is higher than the initial price of the option predicted. The drift term of the underlying only disappears when your net delta is zero. In other words, an unhedged option cannot be priced with no-arbitrage methods

💡Takeaway: Arbitrage Pricing Theory

Sometimes called the Law of One Price, the idea contends that the fair price of a derivative must be equal to the cost of replicating its cash flows. If the derivative and cost to replicate are different then there is free money by shorting one and buying the other. This approach is how arbitrageurs and market-makers price a wide range of financial derivatives in every asset class including:

  • Futures/Forwards
  • Options
  • ETFs and Indexes These derivatives are the legos from which more exotic derivatives are constructed.

A Source of Opportunity

Let’s recap the logic:

  1. Arbitrage ensures that the price of a derivative trades in line with the cost to replicate it.
  1. A master portfolio comprising:
    1. a position in a derivative
    2. an offsetting position in its replicating portfolio
    3. This master portfolio is riskless.
  1. A riskless portfolio will be discounted to present value by a risk-free rate otherwise there is free money to be made.
  1. The prevailing prices of derivatives imply probabilities.
  1. Those probabilities are risk-neutral arbitrage-free probabilities.

But those probabilities don’t need to reflect real-world probabilities. They are simply an artifact of a riskless arbitrage if it exists.

This can lead to a difference in opinion where the arbitrageur and the speculator are happy to trade with each other.

  • The arbitrageur likely has a short time horizon, bounded by the nature of the riskless arbitrage.
  • The speculator, while not engaging in an arbitrage, believes they are being overpaid to warehouse risk.

Examples

1) Warren Buffet selling puts

The Oracle of Omaha engages in oracular activity — not arbitrage. Warren is well-known for his insurance businesses which earn a return by underwriting various actuarial risks. Warren is less famous for his derivatives trades. [The fact that he rails against derivatives as WMDs might be the most ironic hypocrisy in all of high finance but as I always say — we are multitudes.] Like his insurance business, the put-selling strategy hinges on an assessment of actuarial probabilities. In other words, he believes that real-world probabilities suggest a vastly different value for the puts than risk-neutral probabilities. The major source of the discrepancy comes from the drift term in Black Scholes. Warren is pricing his trade with an equity risk premium in excess of the risk-free rate that a replicator who delta hedges would use.

The option traders who trade against him can be right by hedging the option effectively replicating an offsetting option position at a better price than the one they trade with Berkshire. Warren is happy because he thinks the price of the option is “absurd”. In Warren Buffett is Wrong About Options, we see this excerpt from a Berkshire letter during the GFC:

notion image

Jon Seed writes:

Warren’s assumptions aren’t crazy. In fact, they seem to be pretty accurate. As Robert McDonald derives in the 22nd Chapter of his 3rd addition of Derivatives Markets, a 100 year put for $1bn assuming 20% volatility, a long-term risk free rate of 4.4% and a dividend rate of 1.5% implies a Black-Scholes put price of $2,412,997, close to Buffett’s $2.5 million. But Warren isn’t discussing risk-neutral probabilities, those assumed in Black-Scholes and imputed by volatility assumptions. He’s evaluating the model’s probabilities as if they were real, actual probabilities. If we, (really Robert McDonald), evaluates Black-Scholes using real probabilities by also incorporating our best guess of real equity discount rates, we see that the model is consistent with Warren’s common sense approach. Assuming stock prices are lognormally distributed and that the equity index risk premium is 4%, we would substitute 8.4% for the 4.4% risk-free rate, obtaining a probability of less than 1% that the market ends below where it started in 100 years. Buffett also assumes that the expected loss on the index, conditional on the index under-performing bonds, will be 50%. This again is a statement about the real world, not a risk-neutral world, distribution. With an 8.4% expected return on the market, the implied expectation of $1 billion of the index conditional on the market ending below where it started is $596,452,294, or 59.6% of the current index value. Again, this is close to Buffett’s assumption of 50%.

2) FX Carry

FX futures are derivatives. Their pricing is a straightforward output of the covered interest parity formula. I think I learned this concept on the first day of trader class back in the day.

The key to the formula is recognizing that the value of the future is just the arbitrage-free price arising from the difference in deposit rates between the 2 currencies in the pair.

If a foreign currency offers a higher interest rate than a domestic currency, you expect its future to trade at a discount. We won’t bother with the math since the intuition is sufficient:

If you borrowed the domestic currency today to buy the foreign currency so you could earn the yield spread for say 1 year, you’d have a risky trade — you’d be exposed to the foreign currency, and its associated interest income, devaluing when you try to convert it back to the domestic currency.

therefore, to make the trade riskless, you need to lock in the forward rate today by selling the future. You know what that means — you expect that forward rate to trade at the no-arbitrage price

The higher-yielding currency must therefore have a lower forward FX rate.

The carry trade is basically a speculator saying:

“I know the future FX rate should trade at a discount to the spot rate but I’ve noticed that the future rate rolls up to converge to the spot rate, rather than that lower rate being a predictor of the spot FX rate in one year.

So I’m going to buy that FX future and hold it for a profit.”

The carry trade is not an arbitrage or riskless profit. It’s a risky profit. But the opportunity arises because the futures contract would present an arbitrage at any price other than the risk-neutral price.

fi-douche-iary

In last week’s Money Angle I touched ever so briefly on the $TRUMP meme coin. The thinking behind that section continued to stew in my head after I published it. This quote tweet slipped out:

That’s about a 95th percentile virality for my tweets (my social media skills are a slow burn not a neutron star).

I want to talk about this a bit more.

The optics of POTUS shilling openly for personal financial gain is jarring because it conflicts with long-standing norms associated with that office. It’s not that anyone thinks presidents are above corruption, but this is brazen in a way that either offends or emboldens. His defenders may say that politicians are always corrupt and on the margin it’s more virtuous to be open about it. I have my own opinions but the upshot of what I’m about to tell you is that you shouldn’t care what my opinion is anyway. One’s opinion of such things is moot from the forthcoming perspective.

Before we get there, I’ll let others articulate the criticism of what appears to be happening. Here’s Scott Galloway in his recent piece America For Sale (a short, amusing albeit dark ride):

I respect the Trump grift more than the plain vanilla trading on material nonpublic information. It’s more creative, and if you’re going to abuse the public trust, you should do it for billions vs. millions.

The most disappointing thing about our elected officials is not that they’re whores, but what cheap whores they are. For his $250m investment in Trump, the wealthiest man in the world was able to increase his purse by $140b (56,000% ROI). The increase in wealth had nothing to do with the performance of his businesses, but the market’s belief that we are now in a kleptocracy and the distinction between winners and losers is no longer about innovation but proximity to power. The polar vortex of corruption is here, as greater incentives, fewer guardrails, and the sense that character is no longer valued in America have cast a chill across capitalism.

Money has not washed over just our government, but also what has traditionally been a powerful check on corruption, the media. ABC’s Bob Iger sold out and settled rather than fight a lawsuit Trump brought over George Stephanopoulos’s on-air remark that Trump had been “found liable for rape,” a suit that looked very winnable for ABC. Jesus, Bob, really? FYI, the judge in the case also used the R word.

Many are now afraid of confronting Trump and First Lady Elonia, not because they think they might wrong them, but because they are worried about the aggravation and expense of being sued. In the end, the media and the citizenry are making a money choice when what is called for is a moral choice. (See above: Bob Iger.) For people who are not economically secure, it’s upsetting but understandable. For Bob Iger, it’s shareholder value colliding with cowardice. Last year the Disney CEO made $41m. But I’d argue he is increasingly impoverished.

Hold that in your RAM. Here’s a blurb from Byrne Hobart’s “what I’m reading” missive that came out yesterday (emphasis mine):

Ross Douthat has a lengthy interview with Marc Andreessen on how Andreessen and a large number of his peers suddenly switched to supporting Trump. Looking at the evolution of Big Tech’s politics over the last five years certainly induces some whiplash, and makes me long for simple Occam’s Razor-style explanations like “Vladimir Putin finally managed to steal George Sorors’ mind control ray.” But one thing Andreessen says provides some helpful perspective: tech was never uniformly left, and had a small active cohort and a majority of people who went along with what the majority view seemed to be. Now, the winning small cohort is on the right, and the go-along view is now support for Trump. But that explains the big swings. (Another explanation for how vocal they are is that Trump is clearly a man who enjoys effusive compliments. When dealing with someone that braggadocious, it’s not enough to say that he’s good, which is why many people are saying he’s the best President they’ve ever seen.) The interview closes by noting that as soon as the Trump coalition won, the infighting started; politics is not something that happens only on a Tuesday in November.

 

Fi-douche-iary

Ok, let’s start from the abstract. Capitalism.

Trump’s brand of capitalism looks a lot like a Trojan Horse made out deregulated bronze but inside harbors its antithesis. Galloway:

On his first day back in office, Trump signed an executive order delaying the ban for 75 days, saying he wanted to engineer a deal that would give the U.S. half-ownership of the app. “If I don’t do the deal it’s worth nothing,” he said. “If I do the deal it’s worth a trillion dollars.”

This is not a new concept — there’s even a word for it: socialism. Socialism is when the state controls the means of production. America has proven, in spades, that the full body contact of competition creates more economic growth than the government cosplaying a business. Whether it’s the U.K. investing in DeLorean or Obama propping up Solyndra, it usually doesn’t end well.

The leaders of the most important companies in the world are falling in line because the operating system of capitalism’s vulnerability to ransomware is becoming common knowledge in a way that does away with any pretense.

More subtly but just as important is a sense that any action that can be traced back to “creating shareholder value”* will not only get a pass, but be practically mandated. The incentive is umm, I hate to use the word because of its other context, but it’s perfect here: unburdened. There is no quandary about what it means to be a fiduciary. There is only one relevant test now — are you a paperclip maximizer?

[*As of this publication in 2025, “shareholder value” is a postmodern concept. It appears the fastest way to increase your share price is to swap the corporate coffers for BTC.]

Consider Zuck.

Is his recent glow-up genuine or part of his groveling tour to get in the POTUS’s good graces? Zuck is like if Young Sheldon read that Dale Carnegie book then started slavishly going down the checklist to get what he wants. Recall the warning NFL team owner Cameron Diaz gets in Any Given Sunday: “First you get along, then you go along”.

I try to take a charitable line on individuals because our incentives and environments dominate us (even a casual reading of history reveals how thin the line between civil and savage is. If your kids are threatened, you will turn into a werewolf in broad daylight without an ounce of remorse.)

Business leaders are to shut up and dribble because once you win the war of defining capitalism strictly as paperclip maximization then any deviation from that to widen societal values is prisoner’s dilemma suicide. I quote Scott Alexander’s magnificent description of such multi-polar traps in Don’t Look Up It’s Moloch:

All these scenarios [described earlier] are in fact a race to the bottom. Once one agent learns how to become more competitive by sacrificing a common value, all its competitors must also sacrifice that value or be outcompeted and replaced by the less scrupulous. Therefore, the system is likely to end up with everyone once again equally competitive, but the sacrificed value is gone forever. From a god’s-eye-view, the competitors know they will all be worse off if they defect, but from within the system, given insufficient coordination it’s impossible to avoid…in some competition optimizing for X, the opportunity arises to throw some other value under the bus for improved X. Those who take it prosper. Those who don’t take it die out. Eventually, everyone’s relative status is about the same as before, but everyone’s absolute status is worse than before. The process continues until all other values that can be traded off have been – in other words, until human ingenuity cannot possibly figure out a way to make things any worse.

Matt Levine has this ongoing trope of “everything is securities fraud” in reference to the idea that from a market-maxi perspective, anything that hurts your stock price can be adjudicated as a crime. That logic is a profound end-around where the judicial branch subsumes the legislative.

For capitalism to serve us broadly there needs to be some airgap from a corrupt OS lest the worst people will not see “fiduciary” as something to live up to but as a shield for their psychotic impulses.

“Hey, if I don’t [insert objective that sacrifices common good], I miss earnings, my cost of capital increases, and I must fire people.”

Look, if the road to hell is paved with good intentions, then consequentialist thinking is an over-optimized bulldozer. Our frontier of needs requires we resist reductionism, but nuance doesn’t sell or spread. Inverting — if it spreads, it’s propaganda.

DDoS attack on life scripts

Everything so far has been abstract. You read this and think “What am I supposed to do with this? I still gotta knock out this rent?”

I’m 100% with you. I’m just some suburban family man who feels whipsawed by our cultural tug-of-war. Too unstrategic to take a side performatively and too jaded to subscribe to the demands of ideological purity. A coward in the eyes of believers, a fool to the ambitious. Pragmatic enough, idealist enough, and wholly unsatisfying. Like the dust I came from and shall return.

So I move from the abstract to practical rationalization to get on with the business of being. I took some walks with friends to hear different perspectives searching for one I can incorporate with my own feelings to anchor myself amidst the vertigo.

[I recognize that this might sound indulgent to even want to process this stuff but for the days you get between eras of dust you are entitled to be a snowflake just as someone else is entitled to ignore your ass. If you spend your professional life embedded in the very gears of how capital moves it’s natural to wonder about the vinculum between productive norms and their denominator.]

The following is a mish-mash of reflections that took shape in the past few weeks.

The nature of “winners”

Trump and most people with power and wealth are a subset of a group that is self-selected on a very pointy fact — they are heroically relentless at whatever game they’ve chosen. Depending on what you value, this is a feature or a bug but it’s a necessary condition for them to be where they are.

Trump’s life, zoomed out, is a picture of ever-larger victories. In his mind, these victories justify anything he wants. If his game is “give the people what they want”, he’s Ali, Jordan, Gretzky and Phelps combined. A tiny slice of that surplus, whatever calculus or crayons he used to compute it, could easily be tens if not hundreds of billions of dollars and it is cosmic right to take it. I don’t think this is the right way to think but it is A way to think. Go back to Adam’s post I plugged earlier — 2 stupid facts that rule everything.

You can’t relate to Jordan or Napoleon or Trump’s mindset. If you could the world would know of the product of your relentlessness.

Zuck, Andreesen, whatever…it’s just a game. They chose theirs and put on the blinders. That’s how they got where they did (plus luck — blinders aren’t enough to take you all the way, they are necessary but insufficient.)

That there are people who will maximize paperclips as if it were their purpose on earth should not surprise anyone whose eyes are open. Your overtures to any ideals that conflict with their goals might as well be whale sonar — they don’t even hear it if it’s not useful to them. The merit of ideals from the perspective of any other optimization function is simply not a criterion for them to consider it.

This is jarring to humans who are used to operating in a set of norms that is give-and-take. Where their concerns are considered. In Trump’s case, he’s an all-time great listener because his game is giving people what they want. If they wanted cancer, he’d give them that. Like any great power, it’s double-edged. Your view of him depends on which side of the sword you’re on, but the presence of the sword is not in question. Amassing wealth is first and foremost about giving people what they want. The method and products vary but its creation always has that bit in common.

Your own game

Ok, so we’re done with a long-winded but hopefully edifying version of “don’t hate the player, hate the game”. If you want to compete with that, you’re gonna need your own sword. Your own relentlessness. And if you aren’t going to pay the price to battle in their game then you must find your own.

That’s what my original tweet is about. If the only reason you work is for money then watching everyone slash-and-burn their way to riches will corrode your faith in prosocial values. You just feel like an honest sucker.

And this is bigger than the current moment. With automation accelerating, we are bombarded with questions about the value of what we do and ultimately our self-worth. The scaffolding of the set is becoming visible as the world gets more financialized.

[This past week, Kyla and Nick both wrote good pieces on the securitization of attention]

Humanity will be unable to outrun its creations IF the logic of efficiency decides we are costs as opposed to clients. I have little faith in either a) paperclip maximizers being able to consider such a question given their relentless focus and b) even if they could, how would the coordination problem be solved?

[I think a lot about Hardcore History’s Dan Carlin’s thoughtful answer about how humanity would undo itself. He thought about it on a level higher and tried to think of what class of problem it would flow from. He concludes the most diabolical kind — coordination.]

We rip open boxes like honey badgers to get to the fruit. You can’t put anything back in them. We might be able to change the slopes of the arrows of progress but not the direction. So while the curve is not yet exponential, we have to make our peace with the games others play but more importantly, we must understand our own.

You must direct your precious attention to your game as relentlessly as the psychos do to theirs. That’s the only way to decommodify yourself in a world that profits from your negligence of that duty.

There’s no quick way to explain how to do this. It’s the sum of everything I’ve ever put into the Motivation & Creativity and Affirmations & North Stars categories of my writing. But just to help with something immediately I can offer an inspiration and an exercise.

The inspiration is a short post by Matt Zeigler about the history of Sub Pop records:

We’re Not The Best, But We’re Pretty Good (3 min read)

It’s an encouraging reminder that if you focus on quality and survival you will get a chance at longevity. Which is the key to compounding in all the ways you need to flourish.

The exercise is something I did for myself because I can be a bit all over the place and find it settling to narrow my aperture. I tried to write a single line explaining what I do. Something narrow enough to focus, but wide enough to keep my identity from being brittle or defensive as the world changes.

I wrote:

I make words, pictures, and tools to help myself and others make decisions. If I can find others who value this and persuade them (ie build trust that I can help), the economy has a place for me.

Every object-level activity I do career-wise serves this definition. And what those specific activities are will change. Because how could they not.

Moontower #256

Friends,

When this letter started 6 years ago, it was mostly curation — I just shared things I found interesting. Although I write and editorialize much more than I did at the start, the curation will always be a major part of these communications.

In that spirit, Wednesday’s post breakeven, was a pointer to what will prove itself to be a top-tier substack for practical investing knowledge, especially for options.

Today I’m pointing you to another strong recommendation. First, I confess that I subscribe to over 100 letters. I read a small fraction of what I subscribe to. I take a look at the topic and quickly triage whether I care to ever get to it or not. I’m perfectly happy to be on someone’s mailing list even if 1 out of 5 of their posts grabs my attention. That Lord Acton quote “Judge talent at its best (and character by its worst)” holds up well. Every act of creation, whether it’s insight or art, has the potential to stay with you forever. One banger can make up for lots of duds. Slugging ratio is more important than batting average when it comes to substance.

[It’s often the case that something I consider a dud isn’t even a dud, I just wasn’t “ready” for it. If I’m not in the right mindset no high-minded thought piece is gonna matter. I’m too busy being a woodpecker to indulge material that doesn’t fit in my beak’s path.]

That said, there are a few substacks that I almost always read even if the subject isn’t immediately compelling. The writing itself is enough of a reward.

The writer I discovered in 2024 in that category is experimental psychologist Adam Mastroianni. I’ll let his about page speak for itself. I recommended him once before:

“These posts address how our minds work and critically, how they don’t.

The last two are a series about the disaster known as peer review and Adam’s thoughts on how to reform it or create a parallel path.

These posts are all well-argued but also snortingly hilarious.

I’ll add 2 more today.

  1. The Anarchist and the Hockey Stick
  2. Two stupid facts that rule the world — this one is especially important to me because I’ve thought about writing the same message. As I like to remind people, the presence of 8 billion humans in this world is one of the facts that we don’t seem to internalize the ramifications of. This post says what I want to say only with way more skill and humor. The essay is an immediate entrant in Moontower’s Favorite Posts By Others.

Money Angle

In last week’s Money Angle I touched ever so briefly on the $TRUMP meme coin. The thinking behind that section continued to stew in my head after I published it. This quote tweet slipped out:

That’s about a 95th percentile virality for my tweets (my social media skills are a slow burn not a neutron star).

I want to talk about this a bit more.

The optics of POTUS shilling openly for personal financial gain is jarring because it conflicts with long-standing norms associated with that office. It’s not that anyone thinks presidents are above corruption, but this is brazen in a way that either offends or emboldens. His defenders may say that politicians are always corrupt and on the margin it’s more virtuous to be open about it. I have my own opinions but the upshot of what I’m about to tell you is that you shouldn’t care what my opinion is anyway. One’s opinion of such things is moot from the forthcoming perspective.

Before we get there, I’ll let others articulate the criticism of what appears to be happening. Here’s Scott Galloway in his recent piece America For Sale (a short, amusing albeit dark ride):

I respect the Trump grift more than the plain vanilla trading on material nonpublic information. It’s more creative, and if you’re going to abuse the public trust, you should do it for billions vs. millions.

The most disappointing thing about our elected officials is not that they’re whores, but what cheap whores they are. For his $250m investment in Trump, the wealthiest man in the world was able to increase his purse by $140b (56,000% ROI). The increase in wealth had nothing to do with the performance of his businesses, but the market’s belief that we are now in a kleptocracy and the distinction between winners and losers is no longer about innovation but proximity to power. The polar vortex of corruption is here, as greater incentives, fewer guardrails, and the sense that character is no longer valued in America have cast a chill across capitalism.

Money has not washed over just our government, but also what has traditionally been a powerful check on corruption, the media. ABC’s Bob Iger sold out and settled rather than fight a lawsuit Trump brought over George Stephanopoulos’s on-air remark that Trump had been “found liable for rape,” a suit that looked very winnable for ABC. Jesus, Bob, really? FYI, the judge in the case also used the R word.

Many are now afraid of confronting Trump and First Lady Elonia, not because they think they might wrong them, but because they are worried about the aggravation and expense of being sued. In the end, the media and the citizenry are making a money choice when what is called for is a moral choice. (See above: Bob Iger.) For people who are not economically secure, it’s upsetting but understandable. For Bob Iger, it’s shareholder value colliding with cowardice. Last year the Disney CEO made $41m. But I’d argue he is increasingly impoverished.

Hold that in your RAM. Here’s a blurb from Byrne Hobart’s “what I’m reading” missive that came out yesterday (emphasis mine):

Ross Douthat has a lengthy interview with Marc Andreessen on how Andreessen and a large number of his peers suddenly switched to supporting Trump. Looking at the evolution of Big Tech’s politics over the last five years certainly induces some whiplash, and makes me long for simple Occam’s Razor-style explanations like “Vladimir Putin finally managed to steal George Sorors’ mind control ray.” But one thing Andreessen says provides some helpful perspective: tech was never uniformly left, and had a small active cohort and a majority of people who went along with what the majority view seemed to be. Now, the winning small cohort is on the right, and the go-along view is now support for Trump. But that explains the big swings. (Another explanation for how vocal they are is that Trump is clearly a man who enjoys effusive compliments. When dealing with someone that braggadocious, it’s not enough to say that he’s good, which is why many people are saying he’s the best President they’ve ever seen.) The interview closes by noting that as soon as the Trump coalition won, the infighting started; politics is not something that happens only on a Tuesday in November.

 

Fi-douche-iary

Ok, let’s start from the abstract. Capitalism.

Trump’s brand of capitalism looks a lot like a Trojan Horse made out deregulated bronze but inside harbors its antithesis. Galloway:

On his first day back in office, Trump signed an executive order delaying the ban for 75 days, saying he wanted to engineer a deal that would give the U.S. half-ownership of the app. “If I don’t do the deal it’s worth nothing,” he said. “If I do the deal it’s worth a trillion dollars.”

This is not a new concept — there’s even a word for it: socialism. Socialism is when the state controls the means of production. America has proven, in spades, that the full body contact of competition creates more economic growth than the government cosplaying a business. Whether it’s the U.K. investing in DeLorean or Obama propping up Solyndra, it usually doesn’t end well.

The leaders of the most important companies in the world are falling in line because the operating system of capitalism’s vulnerability to ransomware is becoming common knowledge in a way that does away with any pretense.

More subtly but just as important is a sense that any action that can be traced back to “creating shareholder value”* will not only get a pass, but be practically mandated. The incentive is umm, I hate to use the word because of its other context, but it’s perfect here: unburdened. There is no quandary about what it means to be a fiduciary. There is only one relevant test now — are you a paperclip maximizer?

[*As of this publication in 2025, “shareholder value” is a postmodern concept. It appears the fastest way to increase your share price is to swap the corporate coffers for BTC.]

Consider Zuck.

Is his recent glow-up genuine or part of his groveling tour to get in the POTUS’s good graces? Zuck is like if Young Sheldon read that Dale Carnegie book then started slavishly going down the checklist to get what he wants. Recall the warning NFL team owner Cameron Diaz gets in Any Given Sunday: “First you get along, then you go along”.

I try to take a charitable line on individuals because our incentives and environments dominate us (even a casual reading of history reveals how thin the line between civil and savage is. If your kids are threatened, you will turn into a werewolf in broad daylight without an ounce of remorse.)

Business leaders are to shut up and dribble because once you win the war of defining capitalism strictly as paperclip maximization then any deviation from that to widen societal values is prisoner’s dilemma suicide. I quote Scott Alexander’s magnificent description of such multi-polar traps in Don’t Look Up It’s Moloch:

All these scenarios [described earlier] are in fact a race to the bottom. Once one agent learns how to become more competitive by sacrificing a common value, all its competitors must also sacrifice that value or be outcompeted and replaced by the less scrupulous. Therefore, the system is likely to end up with everyone once again equally competitive, but the sacrificed value is gone forever. From a god’s-eye-view, the competitors know they will all be worse off if they defect, but from within the system, given insufficient coordination it’s impossible to avoid…in some competition optimizing for X, the opportunity arises to throw some other value under the bus for improved X. Those who take it prosper. Those who don’t take it die out. Eventually, everyone’s relative status is about the same as before, but everyone’s absolute status is worse than before. The process continues until all other values that can be traded off have been – in other words, until human ingenuity cannot possibly figure out a way to make things any worse.

Matt Levine has this ongoing trope of “everything is securities fraud” in reference to the idea that from a market-maxi perspective, anything that hurts your stock price can be adjudicated as a crime. That logic is a profound end-around where the judicial branch subsumes the legislative.

For capitalism to serve us broadly there needs to be some airgap from a corrupt OS lest the worst people will not see “fiduciary” as something to live up to but as a shield for their psychotic impulses.

“Hey, if I don’t [insert objective that sacrifices common good], I miss earnings, my cost of capital increases, and I must fire people.”

Look, if the road to hell is paved with good intentions, then consequentialist thinking is an over-optimized bulldozer. Our frontier of needs requires we resist reductionism, but nuance doesn’t sell or spread. Inverting — if it spreads, it’s propaganda.

DDoS attack on life scripts

Everything so far has been abstract. You read this and think “What am I supposed to do with this? I still gotta knock out this rent?”

I’m 100% with you. I’m just some suburban family man who feels whipsawed by our cultural tug-of-war. Too unstrategic to take a side performatively and too jaded to subscribe to the demands of ideological purity. A coward in the eyes of believers, a fool to the ambitious. Pragmatic enough, idealist enough, and wholly unsatisfying. Like the dust I came from and shall return.

So I move from the abstract to practical rationalization to get on with the business of being. I took some walks with friends to hear different perspectives searching for one I can incorporate with my own feelings to anchor myself amidst the vertigo.

[I recognize that this might sound indulgent to even want to process this stuff but for the days you get between eras of dust you are entitled to be a snowflake just as someone else is entitled to ignore your ass. If you spend your professional life embedded in the very gears of how capital moves it’s natural to wonder about the vinculum between productive norms and their denominator.]

The following is a mish-mash of reflections that took shape in the past few weeks.

The nature of “winners”

Trump and most people with power and wealth are a subset of a group that is self-selected on a very pointy fact — they are heroically relentless at whatever game they’ve chosen. Depending on what you value, this is a feature or a bug but it’s a necessary condition for them to be where they are.

Trump’s life, zoomed out, is a picture of ever-larger victories. In his mind, these victories justify anything he wants. If his game is “give the people what they want”, he’s Ali, Jordan, Gretzky and Phelps combined. A tiny slice of that surplus, whatever calculus or crayons he used to compute it, could easily be tens if not hundreds of billions of dollars and it is cosmic right to take it. I don’t think this is the right way to think but it is A way to think. Go back to Adam’s post I plugged earlier — 2 stupid facts that rule everything.

You can’t relate to Jordan or Napoleon or Trump’s mindset. If you could the world would know of the product of your relentlessness.

Zuck, Andreesen, whatever…it’s just a game. They chose theirs and put on the blinders. That’s how they got where they did (plus luck — blinders aren’t enough to take you all the way, they are necessary but insufficient.)

That there are people who will maximize paperclips as if it were their purpose on earth should not surprise anyone whose eyes are open. Your overtures to any ideals that conflict with their goals might as well be whale sonar — they don’t even hear it if it’s not useful to them. The merit of ideals from the perspective of any other optimization function is simply not a criterion for them to consider it.

This is jarring to humans who are used to operating in a set of norms that is give-and-take. Where their concerns are considered. In Trump’s case, he’s an all-time great listener because his game is giving people what they want. If they wanted cancer, he’d give them that. Like any great power, it’s double-edged. Your view of him depends on which side of the sword you’re on, but the presence of the sword is not in question. Amassing wealth is first and foremost about giving people what they want. The method and products vary but its creation always has that bit in common.

Your own game

Ok, so we’re done with a long-winded but hopefully edifying version of “don’t hate the player, hate the game”. If you want to compete with that, you’re gonna need your own sword. Your own relentlessness. And if you aren’t going to pay the price to battle in their game then you must find your own.

That’s what my original tweet is about. If the only reason you work is for money then watching everyone slash-and-burn their way to riches will corrode your faith in prosocial values. You just feel like an honest sucker.

And this is bigger than the current moment. With automation accelerating, we are bombarded with questions about the value of what we do and ultimately our self-worth. The scaffolding of the set is becoming visible as the world gets more financialized.

[This past week, Kyla and Nick both wrote good pieces on the securitization of attention]

Humanity will be unable to outrun its creations IF the logic of efficiency decides we are costs as opposed to clients. I have little faith in either a) paperclip maximizers being able to consider such a question given their relentless focus and b) even if they could, how would the coordination problem be solved?

[I think a lot about Hardcore History’s Dan Carlin’s thoughtful answer about how humanity would undo itself. He thought about it on a level higher and tried to think of what class of problem it would flow from. He concludes the most diabolical kind — coordination.]

We rip open boxes like honey badgers to get to the fruit. You can’t put anything back in them. We might be able to change the slopes of the arrows of progress but not the direction. So while the curve is not yet exponential, we have to make our peace with the games others play but more importantly, we must understand our own.

You must direct your precious attention to your game as relentlessly as the psychos do to theirs. That’s the only way to decommodify yourself in a world that profits from your negligence of that duty.

There’s no quick way to explain how to do this. It’s the sum of everything I’ve ever put into the Motivation & Creativity and Affirmations & North Stars categories of my writing. But just to help with something immediately I can offer an inspiration and an exercise.

The inspiration is a short post by Matt Zeigler about the history of Sub Pop records:

We’re Not The Best, But We’re Pretty Good (3 min read)

It’s an encouraging reminder that if you focus on quality and survival you will get a chance at longevity. Which is the key to compounding in all the ways you need to flourish.

The exercise is something I did for myself because I can be a bit all over the place and find it settling to narrow my aperture. I tried to write a single line explaining what I do. Something narrow enough to focus, but wide enough to keep my identity from being brittle or defensive as the world changes.

I wrote:

I make words, pictures, and tools to help myself and others make decisions. If I can find others who value this and persuade them (ie build trust that I can help), the economy has a place for me.

Every object-level activity I do career-wise serves this definition. And what those specific activities are will change. Because how could they not.

Money Angle For Masochists

I will use this section as a boost for Thursday’s paywalled post:

The feedback on this one confirmed my sense that it would be one of the most important option posts I’ve written because it gives a walk-thru of a major topic that encompasses so many critical pricing ideas (there’s a downloadable spreadsheet included so you can get your hands dirty).

These are 2 additional excerpts from the paywalled section:

  1. [Bonus observation: power law functions handle vol term structures well. Remember a power function can be converted to a line using a log-log transformation where your variable Y is vol and X is DTE so you can fit a linear regression. You can start to imagine a wider infra where you have a well-defined event calendar, extract implied events sizes everywhere, and fit base vol term structures to identify kinks, ie buy and sell signals. Suddenly it dawns on the reader what relative value vol trading looks like. Throw in layers of execution topics and you can see the basic truth — there isn’t any magic sauce it’s just fastening a thousand submarine doors before the thing can go anywhere. And every day the state of the art of little door details inches up.]
  2. Trading vol around events is a major topic. At scale, quants will have more “proper” methods for doing this but I can tell you that a significant portion of my career earnings have come from understanding this stuff. (It was 20 years ago, about 2005, that I was starting to build this infra. All in Excel by the way.) The techniques improve. I’m not a quant as I’ve said many times. I don’t know the state-of-the-art but with some simple math and yea a lot of endurance, observing, noticing you can go quite far. Is this gonna turn you into SIG or Jane? Hell no, but these are the ant trails that take you to the questions. To a frame of mind that measures for and seeks contradiction. Notice how little broad opinions matter. Instead, you are trying to turn market prices into mini-hypothesis. Trades are tests against hypothesis. But it starts with measurement. Here are a few questions that option traders are asking every day…

 

From My Actual Life

Ok, this isn’t from my life but wtaf 🤯🤯🤯

another XIV brewing in crypto?

If you don’t know what MicroStrategy (MSTR) then congrats, you have won life. Close this tab and go back to sliding down rainbows and swimming with otters.

For those who remain you likely know that Saylor has been financing his BTC purchases from sale of convertible bonds.

I have nothing to add to that conversation but I have a trade idea. It’s gonna take some background to build up to it.

First, there are 2 required reads. They aren’t long and they’re excellent. The best combination. I will highlight some key points from them.

Convert of Doom: Microstrategy and the dark arts of ‘volatility arbitrage’ (6 min read)
by Alexander Campbell

This post explains how Saylor is effectively arbitraging the MSTR’s volatility by issuing convert that pay zero interest. This works because a convert is just a bond with an embedded call option. By delta hedging the implied vol in the embedded option, dealers or investors can earn a return if the realized vol exceeds the implied vol. The expected return presumably compares favorably or at least similarly to if MSTR just issued interest-bearing debt but Saylor, is effectively transmuting volatility into interest payments.

[In general, when a convert is first issued it’s common for both the stock and vol to decline as dealers hedge both the delta and often the implied vol by selling long-dated options to offset some of the vega they’ve bought at a discount.]

Campbell is both educational and insightful showing how:

1) the Merton model can be used to understand why MSTR is so much more volatile than BTC — the MSTR’s premium to NAV is positively correlated to BTC!

(In Battle Scars As A Call Option, I explained how one of my most painful trades occurred when I was long UNG vol when it went premium to NAV. In that case, the sizeable premium was inversely correlated with the price of gas. The exact opposite scenario of MSTR’s juiced vol today!)

2) this is a regulatory arbitrage.

Quoting Campbell:

Result: Retail buys MSTR shares at 150% premium while sophisticated investors arbitrage vol differentials and MSTR books the diff between all these trades as profitable transactions.

Here’s the irony: We require hedge funds to register with the SEC, spend $50-500k annually on compliance, and limit themselves to accredited investors with millions in the bank. Yet retail investors can freely buy MSTR shares through Robinhood.

And therein lies all the difference. There’s nothing wrong with what MSTR is doing, but it’s a good example of the law of unintended consequences.

Regulators block retail from ‘risky’ hedge funds while inadvertently pushing them into something potentially more dangerous.

By restricting crypto access for years, regulators left retail investors few options. Bitcoin futures required $300k contracts with 50-100% margin. ETFs were obscure or nonexistent. So people bought MSTR instead – a far more complex and potentially risky vehicle.

In trying to protect retail investors, the SEC has inadvertently funneled them into a potentially much riskier product.

Which brings us to the next required reading:

Moonshot or Shooting Star? A Volatile Mix of MicroStrategy, 2x Leveraged ETFs and Bitcoin (7 min read)
by Elm Wealth

Oh how I love the existence of levered ETFs on concentrated ideas. This post echoes a very real possibility of XIV’s “volmageddon”.

Something we’ve discussed ad nauseum in this letter is volatility drag and how geometric returns diverge much lower from arithmetic returns as we increase volatility. The divergence is proportional to variance or volatility squared.

The article links to a neat calculator which offers hands-on lesson in volatility drag.

💡Learn more💡

And linking these to options which is where we are heading:

Exponents are good, wholesome fun. And this post was certainly that, inspiring the the trade idea we’re building towards.

The long quote below (emphasis mine) cuts to the heart of the matter.

Now let’s use some data to look at the probability of going bust just from a single really bad day. The price of a 2x leveraged ETF should go to zero if the price of the stock underlying the ETF goes down by 50% or more in a single day. The probability of such an event is a function of the variability of the MSTR stock price. If we assume the volatility of MSTR will be about 90% (or 5.6% per day), then we could think of a 50% decline in the stock price in one day as being a roughly 9x daily volatility move. A natural question is how often do stocks with very elevated variability, like MSTR, experience days when they decline by 9x their daily variability in returns?

We looked at about 1500 US stocks over the past 50 years, chosen so that at some point they were within the top 1000 stocks by market-cap. We found that the annual probability of such stocks experiencing a one-day price decline of 9x daily volatility was about 6%.

[Kris: The fatness of the tails should swipe you like a dragon. In Mediocristan, 9 standard dev moves don’t happen.]

This isn’t quite the final answer though, as we need the probability of a stock dropping by that much some time during the day, rather than just close-to-close. The usual estimate for the probability of touching a level over some time interval is to simply double the probability of being below that level at the end.

[The explanation of this is the same logic we’ve discussed whereby we estimate the probability of a one-touch by doubling the delta. Here’s Elm Wealth explaining:

To see why this is true in a simple random walk without drift, note that for every path that finishes below the level at the end of the period, there is another path where it hit the level and then followed a path that was a mirror of the path that finished below the level. So, for every path that finished below the relevant level (here a 50% drop), there’s another path that touched the level but then reflected and wound up above the level at the end.]

So, assuming MSTR volatility of 90% per annum, the probability of a down 50% intra-day move occurring at least once over the next year is about 12%.

If we use the MSTR volatility implied by the options market of 160%, then down 50% is only 5x daily volatility. The same data as above yields a close-to-close annual probability of about 30%, which we estimate as about a 60% probability of an intra-day drop that would send the ETF to 0.

There are a number of alternative perspectives one could take in trying to estimate this probability: for instance, trying to estimate the probability of a large one-day drop in Bitcoin and how that might impact the MSTR premium to BTC. For example, a 25% one day drop in BTC and a 33% collapse of the MSTR premium would imply a 50% drop in the MSTR share price.

[Kris: This hints at the MSTR premium vs BTC correlation Campbell wrote about]

A more complex analysis might try to estimate whether it is possible for these leveraged ETFs to become large enough that their daily rebalancing trades could themselves drive the price down 50% in one day. For example, imagine that MSTR rapidly triples in price due to some combination of BTC rally and an increase in MSTR’s premium to the BTC it owns, and the assets in the MSTR leveraged ETFs go from $5 billion to $30 billion. The market capitalization of MSTR could be about $270 billion and the leveraged ETFs would be owning $60 billion, or 22%, of MSTR stock outstanding.

Now imagine for some reason, MSTR stock drops 15% during the day – which, given MSTR volatility, would not be unusual. The leveraged ETFs would need to sell $9 billion of MSTR stock at the closing price. Recently, MSTR daily average trading volume at the close of the day has been about $2 billion, so this would be quite an impactful amount of MSTR to sell at the end of the day. For every 1% the price declines further than the 15%, the ETFs will need to sell another $500 million of MSTR, and if that pushes the price down by another 1%…well, you can see this doesn’t have a happy ending for owners of the leveraged ETF or MSTR.

[Kris: see The Gamma of Levered ETFs]

Bottom line, we think there’s a pretty decent probability – somewhere in the range of 15% to 50% – that these 2x leveraged MSTR ETFs are effectively wiped out in any given year if they are not voluntarily deleveraged or otherwise de-risked sooner.

Towards a trade idea

The 2x ETF is MSTU and the 2x inverse ETF is MSTZ. Unless these are delevered, if MSTR [falls/rises] by 50% in one day [MSTU/MSTZ] goes to zero.

I’m going to walk you through my stream of consciousness as I reached the end of the article.

1) I’ll accept Elm Wealth’s logic , my first question is…um, are there options listed on the levered ETFs?!

Checkmark✔️

MSTZ is thin but MSTU has over 350k contracts of OI.

2) We are not in Kansas anymore. The distribution is extremely discontinuous.

On a hellacious down day in BTC coinciding with premium compression (that positive correlation that Saylor has been monetizing being his undoing is the kind of poetry markets like to write) and the telegraphed, reflexive ETF rebalance flows can take MSTU straight to zero XIV style.

And this can happen on any day.

3) So the next thought in the chain was to consider buying 0DTE puts. Like every morning before brushing my teeth.

This is a non-starter for 2 reasons.

i. 0DTEs are not listed on MSTU

ii. ODTEs don’t capture the overnight vol so you don’t own “all” the risk. This is especially important in BTC since it’s a 24 hr market.

4) We’ll come back to the question of expiry. I’m just adhering to the sequence of my thinking for better or worse (feel free to debug my mental compiler).

So what strike do I want? The bet only hinges on a Boolean outcome — did MSTR fall 50% or not?

If the thrust of the trade is so starkly binary then the put I want is lowest strike on the board that you can pay a penny for. I only care about maximum odds. The strike is the payoff, the premium is the outlay. So if I buy the $5.00 put for a penny I get 499-1 odds.

[Since we are thinking in a risk-budgeted binary way rather than in continuous option terms, a parallel framing would be the $5/$0 put spread]

It’s worth noting that this is a bit weird compared to typical investment scenarios. You really only care about the distance of the strike from 0 which determines the payoff and the premium. The price of the stock doesn’t matter because your payoff depends on a certain percent move happening. No matter what nominal price MSTU trades for, if MSTR goes down 50% MSTU gets wiped out.

Let’s start by thinking aloud about constructing a bet and work from concrete to abstract before we bring it back to concrete again.

Buying a 2-week put

Suppose you spend $1,000 2x per month to buy puts that cost $.01.

(Because of the 100x multiplier this translates to 1,000 option contracts)

If you are buying the $2.50 strike, you will get paid $250,000 if MSTU hits zero.

Over the course of the year, following this strategy will cost $24,000 ($1000 twice a month).

Say it hits on the last trial, your net profit is $226,000 (payoff – cumulative outlay). Call it 9-1 odds.

If MSTU has a 10% chance of hitting zero within the year, this is a fair bet. If the probability is higher, you have positive edge, lower you have negative edge.

This a good place to pause for birthday problem math. It allows us to convert into a useful unit of probability per day.

MSTU trades 251 days a year. If we think it’s 10% to hit 0 one of the days we can compute the probability of it NOT hitting zero on any given day like this:

(1 – p²⁵¹) = 10%

p = 99.958%

Converting to odds:

.99958 / ( 1- .99958) ~ 2382

The odds against MSTU hitting zero on a random day is 2382-1.

If there were 0DTEs if you could buy say any strike from $24 or higher for a penny you would have edge to your model probability of “There’s a 10% chance that MSTU hits zero this year”.

Using the daily probability to compute the chance of MSTU going to zero in 10 business days (roughly what a 2-week option encompasses).

1 – .99958¹⁰ = 99.581% or 238-1 odds.

If you can buy a 2-week $3 strike put for a penny you’d have edge to this probability.

We can extend the reasoning above to construct useful tables based on a range of assumptions about the “probability of MSTU going to zero with a year”.

 

Let’s step through an example.

If you believe MSTU has a 20% chance of going to zero in a year, then you need to 56-1 odds on a 1-month put for it to be fairly priced (and assuming the ETF getting zero’d is the only way to win).

[To compute the payoff ratio: strike / (strike – premium)]

If you could buy the 1-month $.57 strike (yes, a very low strike!) for a penny you would get the 56-1 odds.

I started with this whole “what option can I pay a penny for” reasoning because my intuition told me that for a trade like this you will want a strategy that trades an a very near-dated option for a teeny price because that’s probably where you are going to find the best odds in this framework.

But I should not get to anchored to either this penny idea or the notion that the near dated is absolutely the right way to play this.

At this point, it’s time to look at some data to see if:

1) the prices are ever attractive

2) can we narrow down an expiry range

Market prices

The first thing I did was pull up an option chain for the regular monthly expiry — Jan2025. Good news. While the far OTM puts markets are sometimes wide, several strike are 0 bid, offered at $.05 but critically last sale is $.01. There’s someone who sells these things for a penny.

[This is not the case for the puts in the less liquid MSTZ double short ETF. The markets are also much wider. What does this tell you?]

I fetched fitted end-of-day put prices for MSTU options from 9/24/24 to 1/6/25, filtering for all puts below 1.5 delta. FAR out-of-the-money puts (the puts that correspond to the 98.5% call).

  • I computed the payoff ratios for all puts less than 1.5 delta by comparing strike and premiums as explained earlier.
  • The color coding corresponds to expiry buckets in calendar days (ie 1-10, 11-20, etc)
  • I added a penny to all the premiums. So an option fitted to be $0 is marked at $.01

Right away 2 things stand out:

  1. The chart has trash scaling because of point #2
  2. As expected, you are going to get much better payout ratios on near-dated options. If there’s 2 DTE and the stock is $100, buying the $50 put for a penny offers 4999-1 odds.

So the intuition about the near-dated being better bang for the buck seems correct but the scaling is obscuring the picture and there’s another problem (we’re going to get to it but if you feel up to it, try to guess what it is. One hint is it’s not about transaction costs. That’s important and I’ll say a word about it later as well but that’s not the angle here.)

Let’s fix the scaling. Log base 2 compresses this range nicely and is easy to interpret (every tick mark doubles the payoff).

Ahh, much better. Now we see a smooth descent of payout ratios. To be clear, a y-value of 10 is 2¹⁰ or a payoff ratio of 1024-1. An 11 is 2048-1, and so forth.

Here’s the payoff table reproduced in log base 2 terms:

You can see how the puts suggest the market thinks the probability of MSTU disappearing is somewhere in the 10-15% range (but probably less since you can win on the puts without the ETF zero’ing).

The risk/reward on these near-dated puts is much higher than the deferred puts which is expected since we require much higher odds. Remember if we thought that there’s a 10% chance of MSTU zero’ing in a year, a $10 strike put can trade for $1 (ie 9-1 odds) and be fairly priced. But these short-dated options need to offer much better odds to compensate for a much smaller probability window of MSTU going under.

We need to compare the payoff ratios with the probabilities we inferred from the annual probability (the birthday math) for the stock zero’ing in 1 week, 1 month, etc.

But before that we can address the mystery problem.

By comparing the strike & premiums we can identify if an option is cheap or expensive compared to our model probability but we can’t assess the validity at the strategy level. In other words, we can’t answer whether it’s better to spend $24k on long-dated puts or $2k a month on 1-month puts.

To handicap that we need to adjust our payoff ratios by how often we need to trade so that we can now compare all the strategies on the same measuring stick — “if my annual probability of MSTU zero’ing is X, what’s the best approach”.

So we divide the payoffs by the number of times you must trade per year.

[Used some simple rules, ie for 1 dte, we divide by 251, for 30 dte by 12]

We don’t need to use log scaling for the strategy level chart.

The way to read this is if you think the annual probability is greater than say 20% (see the horizontal dashed lines) than all opportunities above the line are positive expectancy. There’s a lot more opportunity in the nearer-dated confirming the original intuition but every now and again it looks like a 2-3 month put gets fairly cheap.

The median payout ratio normalized to annual odds is 7-1 or 12.5% implied probability of MSTU offing itself.

 

In summary:

  1. MSTR is highly volatile
  2. If it moves 5-10x it’s daily standard deviation in one day to the downside, MSTU can go to zero.
  3. Those size moves historically (via Elm’s article) happen about as often someone rolls a 10 with 2 dice if we say MSTR is 100 vol. If we use it’s implied vol which is more forward looking, we’re it’s more like rolling a 7.
  4. The market seems to price the puts in-between those possibilities but we see that the price moves around quite a bit so you can scoop some when they get offered cheap.
  5. The more aum MSTU gathers the larger the end of day rebalance trade. Something to keep in mind.

Keeping a close eye on this, perhaps building a monitor around this idea is a nice way to grab a convex outcome. Especially one that I suspect has reflexive properties that are conservatively ignored in this independent events “birthday math”.

Endnote on execution

I assumed $.01 slippage on these options. If you pay $.02 for an option that we computed the payoff based on a penny, you’re getting half the odds. So when talking about really long odds and teeny probabilities and option prices, costs matter. Regardless, you have all the knowledge you need to compare max payoff to your own execution prices to bridge this fully to reality.

anchor yourself

Trump launched a memecoin on Friday night. One wallet (presumably his) owns 80% of it. At the time I’m writing this, he’s $24B richer.

You read that correctly. “B” like 🐝

Anyway, there’s a vesting period and no obvious way how he can monetize this without crushing the price. Maybe he can force a bank or another country to accept it as loan collateral. Or maybe he can demand the Treasury to buy it to diversify strategic reserves like its gold.

I’m kidding. I don’t think he can do such things. But also, if there’s a will there’s a way and I suppose a man named “Trump” ridin’ the mother of all heaters is some kind of cosmic onomatopoeia.

Anyway, this brings me to 2 tweets I saw pretty close together on the timeline.

https://x.com/JPATrades/status/1880618717966635301?t=ydG2c1cju6qiXFv1M3RM7A&s=19
https://x.com/edgefills/status/1880716333329080688

In the early 2000s, I was in a fantasy football league that didn’t have a waiver system. Free agency 24/7 all week. The rules rewarded crackheads who followed football every second, ready to jump online to secure Denver’s backup RB when the starter’s knee exploded live TV. In other words, derelicts like myself who didn’t have a family in their 20s.

Today, I would never be in such a league. Not my speed anymore.

In fact, one of the reasons I left full-time trading was because it’s out of phase with how I want to live. I was never a news junkie. Having a job that required you to be on top of the news became an energy-suck. Playing a video game Trading for Living has a particular cadence.

Cadence. Rhythm. These are important dimensions in matching yourself to what you do.

Trading is different than a lot of desk careers. It’s a bell-to-bell job. Not a lot of homework. No deadlines.

But the best trade of the day can happen at 10:04 in the morning and if you were in the bathroom, you might as well have stayed home. Need to run an errand midday or meet someone for lunch? That can wait. For 30 years. You might make millions but you’re chained to a desk like a 9-year-old who has to raise her hand to go to the bathroom.

The point isn’t to say what’s better or worse. It’s just that trading has a pace and if you like to read peacefully, deliberate decisions slowly, and avoid paranoia you will find the environment stressful. Not to mention the boredom. A trader is like an EMT or firefighter on a slow day. Waiting but ready. Boredom is major problem for exactly the kind of people who think trading would be a great way to be in the action. You fold a lot of hands. But that takes discipline. Lapses in willpower or even a lack of sleep can seduce you into “loosening” your starting requirements to see the next card.

Those tweets above combined with FOMO and the proliferation of “if you can’t beat em, join’em” rationalization is gonna lure people towards spending their brain cycles on things that will feel deeply unfulfilling and that they are poorly matched to.

If you’re a financial thrillseeker these times are for you. If you are a builder or craftsperson, technology tools are accelerating. More power at your fingertips.

Either way…let your focus anchor you.

Why do you do anything? Maybe go a few whys deep. The alternative will be being battered by the waves. Adrift. And angry. There’s going to be a lot of games happening in front of your eyes. Some say there always have been, at least now it’s out in the open. Touche. But there are consequences to that too.

Are you better off or worse off?

It’s a deeply personal question. I am increasingly of the belief that within a decade, your own whys will be the only questions. We are leaving a world where people (at least people with the luxury to read substacks) just compile their parent’s script. Doing things because it just seems like the next thing to do.

It won’t make sense to do that in the same way it doesn’t make sense to describe a color as round or a chord as wet.

A musing by a reader

I am sharing this with permission from a professional option mm who sent it to me. I deleted any identifying info. The person has been reading moontower for a long time and was graciously sharing.

Thought I’d share a few things I’ve learned. Most will be obvious to you, but maybe a nugget in here for one of your posts.

1) Starting with the obvious: market making is the hardest way to make an easy living. You can grind it out every single day scraping away ticks for edge, and at the end of the day your outcomes are decided by liquidity and volatility. They’re the two things you can’t control, and they’re the two things that determine your fate. This isn’t true for everyone, but it’s certainly true for [redacted].

2) I firmly believe that actively trading is not sustainable for sane human beings. Managing an options portfolio is like taking care of a baby. It’s a living organism that constantly needs to be tended to. If you neglect it, it will die. The amount of mindshare it takes up and context-switching is just simply unmanageable over long periods of time. The intensity it takes to perform at your best during market hours takes a beating on the human body. The guys on my team are [ages redacted] and look like they’re [redacted]. Besides a few partners, I don’t know a person here that doesn’t have a drinking problem. This is anecdotal, but I see it from other groups too.

3) Trading vol is easy. Managing a position is hard. I’m convinced you need to be borderline OCD to manage a book. Between the pruning of positions and the fine-tuning of the model, you have to have an insane attention to detail to get an acceptable slide.

4) You’re always underpaid until you’re a partner or PM. I won’t go into detail on this one because you did a whole blog post on it (maybe it was just a tweet idk). I’ll just say that you nailed it.

[Kris: See Getting Less Screwed On Compensation and adverse selection in the option job market]

5) Like most things, luck is the difference between 0 or hero in this industry and it doesn’t matter if you trade long or short. I’ve seen groups blow up in a matter of days. I’ve seen groups that should’ve blown up and then came back to make a fukin stupid amount of money from continuing to hold short.

“over-the-shoulder” substance

When I worked at Parallax I used to carpool with 3 good friends I worked with. On our rides back and forth, we frequently talked about trading situations that came up on the desk, “Yesterday a broker showed me this, I responded with that, how would you have handled it?”

It was the equivalent of game film for trading. I used to joke that if we recorded the calls on Periscope (remember Periscope?) it would be must-see tv for the fintwit crowd.

Given privacy and compliance, it was a non-starter idea. More broadly I thought that what I call“over-the-shoulder” educational material would be popular. The same way you watch Twitch to see how someone plays a game. Watching their mind work in real-time. Or watching somebody learn to play a song on the guitar by ear especially if they haven’t heard the song before. You pick up a bunch of stuff from what’s typically left out of a scripted tutorial. The mistake they make and how they correct it. Or how they started in the first place with the equivalent of a blank sheet.

I want to hear their reasoning out loud. I want it to be raw.

A few years ago, I watched this guy solve an insane sudoku as he narrated his thinking. It’s one of the most delightful YouTube videos I’ve ever watched.

On the heels of the Moontower Discord Voice chat I hosted a week ago, I thought heck let me try my hand at an over-the-shoulder video. I planned to talk about how to think about synthetic futures in the options market. I opened up my Interactive Brokers account option chains and a spreadsheet and just started riffing.

Since I did no prep, I figured instead of just recording a video I’d just livestream on X/Twitter. From one thought to the next, I end up covering almost an hour of info.

The feedback to what I saw as merely an experiment was tremendous. It got nearly 13k views and lots of love. I guess I’ll be doing more of this kind of thing.

I uploaded it to YT. I hope you find it useful.

 

An unscripted tour of key option concepts as I look at live data including:

  • Synthetic futures
  • Implied interest rates
  • Reversal/Conversions
  • Box rates
  • Tracking structures in IB
  • P/L attribution of a strangle
  • Tickers used: TSLA IBIT SPX

Moontower #255

Friends,

When I worked at Parallax I used to carpool with 3 good friends I worked with. On our rides back and forth, we frequently talked about trading situations that came up on the desk, “Yesterday a broker showed me this, I responded with that, how would you have handled it?”

It was the equivalent of game film for trading. I used to joke that if we recorded the calls on Periscope (remember Periscope?) it would be must-see tv for the fintwit crowd.

Given privacy and compliance, it was a non-starter idea. More broadly I thought that what I call“over-the-shoulder” educational material would be popular. The same way you watch Twitch to see how someone plays a game. Watching their mind work in real-time. Or watching somebody learn to play a song on the guitar by ear especially if they haven’t heard the song before. You pick up a bunch of stuff from what’s typically left out of a scripted tutorial. The mistake they make and how they correct it. Or how they started in the first place with the equivalent of a blank sheet.

I want to hear their reasoning out loud. I want it to be raw.

A few years ago, I watched this guy solve an insane sudoku as he narrated his thinking. It’s one of the most delightful YouTube videos I’ve ever watched.

On the heels of the Moontower Discord Voice chat I hosted a week ago, I thought heck let me try my hand at an over-the-shoulder video. I planned to talk about how to think about synthetic futures in the options market. I opened up my Interactive Brokers account option chains and a spreadsheet and just started riffing.

Since I did no prep, I figured instead of just recording a video I’d just livestream on X/Twitter. From one thought to the next, I end up covering almost an hour of info.

The feedback to what I saw as merely an experiment was tremendous. It got nearly 13k views and lots of love. I guess I’ll be doing more of this kind of thing.

I uploaded it to YT. I hope you find it useful.

 

An unscripted tour of key option concepts as I look at live data including:

  • Synthetic futures
  • Implied interest rates
  • Reversal/Conversions
  • Box rates
  • Tracking structures in IB
  • P/L attribution of a strangle
  • Tickers used: TSLA IBIT SPX

Money Angle

Trump launched a memecoin on Friday night. One wallet (presumably his) owns 80% of it. At the time I’m writing this, he’s $24B richer.

You read that correctly. “B” like 🐝

Anyway, there’s a vesting period and no obvious way how he can monetize this without crushing the price. Maybe he can force a bank or another country to accept it as loan collateral. Or maybe he can demand the Treasury to buy it to diversify strategic reserves like its gold.

I’m kidding. I don’t think he can do such things. But also, if there’s a will there’s a way and I suppose a man named “Trump” ridin’ the mother of all heaters is some kind of cosmic onomatopoeia.

Anyway, this brings me to 2 tweets I saw pretty close together on the timeline.

https://x.com/JPATrades/status/1880618717966635301?t=ydG2c1cju6qiXFv1M3RM7A&s=19
https://x.com/edgefills/status/1880716333329080688

In the early 2000s, I was in a fantasy football league that didn’t have a waiver system. Free agency 24/7 all week. The rules rewarded crackheads who followed football every second, ready to jump online to secure Denver’s backup RB when the starter’s knee exploded live TV. In other words, derelicts like myself who didn’t have a family in their 20s.

Today, I would never be in such a league. Not my speed anymore.

In fact, one of the reasons I left full-time trading was because it’s out of phase with how I want to live. I was never a news junkie. Having a job that required you to be on top of the news became an energy-suck. Playing a video game Trading for Living has a particular cadence.

Cadence. Rhythm. These are important dimensions in matching yourself to what you do.

Trading is different than a lot of desk careers. It’s a bell-to-bell job. Not a lot of homework. No deadlines.

But the best trade of the day can happen at 10:04 in the morning and if you were in the bathroom, you might as well have stayed home. Need to run an errand midday or meet someone for lunch? That can wait. For 30 years. You might make millions but you’re chained to a desk like a 9-year-old who has to raise her hand to go to the bathroom.

The point isn’t to say what’s better or worse. It’s just that trading has a pace and if you like to read peacefully, deliberate decisions slowly, and avoid paranoia you will find the environment stressful. Not to mention the boredom. A trader is like an EMT or firefighter on a slow day. Waiting but ready. Boredom is major problem for exactly the kind of people who think trading would be a great way to be in the action. You fold a lot of hands. But that takes discipline. Lapses in willpower or even a lack of sleep can seduce you into “loosening” your starting requirements to see the next card.

Those tweets above combined with FOMO and the proliferation of “if you can’t beat em, join’em” rationalization is gonna lure people towards spending their brain cycles on things that will feel deeply unfulfilling and that they are poorly matched to.

If you’re a financial thrillseeker these times are for you. If you are a builder or craftsperson, technology tools are accelerating. More power at your fingertips.

Either way…let your focus anchor you.

Why do you do anything? Maybe go a few whys deep. The alternative will be being battered by the waves. Adrift. And angry. There’s going to be a lot of games happening in front of your eyes. Some say there always have been, at least now it’s out in the open. Touche. But there are consequences to that too.

Are you better off or worse off?

It’s a deeply personal question. I am increasingly of the belief that within a decade, your own whys will be the only questions. We are leaving a world where people (at least people with the luxury to read substacks) just compile their parent’s script. Doing things because it just seems like the next thing to do.

It won’t make sense to do that in the same way it doesn’t make sense to describe a color as round or a chord as wet.

Money Angle For Masochists

I am sharing this with permission from a professional option mm who sent it to me. I deleted any identifying info. The person has been reading moontower for a long time and was graciously sharing.

Thought I’d share a few things I’ve learned. Most will be obvious to you, but maybe a nugget in here for one of your posts.

1) Starting with the obvious: market making is the hardest way to make an easy living. You can grind it out every single day scraping away ticks for edge, and at the end of the day your outcomes are decided by liquidity and volatility. They’re the two things you can’t control, and they’re the two things that determine your fate. This isn’t true for everyone, but it’s certainly true for [redacted].

2) I firmly believe that actively trading is not sustainable for sane human beings. Managing an options portfolio is like taking care of a baby. It’s a living organism that constantly needs to be tended to. If you neglect it, it will die. The amount of mindshare it takes up and context-switching is just simply unmanageable over long periods of time. The intensity it takes to perform at your best during market hours takes a beating on the human body. The guys on my team are [ages redacted] and look like they’re [redacted]. Besides a few partners, I don’t know a person here that doesn’t have a drinking problem. This is anecdotal, but I see it from other groups too.

3) Trading vol is easy. Managing a position is hard. I’m convinced you need to be borderline OCD to manage a book. Between the pruning of positions and the fine-tuning of the model, you have to have an insane attention to detail to get an acceptable slide.

4) You’re always underpaid until you’re a partner or PM. I won’t go into detail on this one because you did a whole blog post on it (maybe it was just a tweet idk). I’ll just say that you nailed it.

[Kris: See Getting Less Screwed On Compensation and adverse selection in the option job market]

5) Like most things, luck is the difference between 0 or hero in this industry and it doesn’t matter if you trade long or short. I’ve seen groups blow up in a matter of days. I’ve seen groups that should’ve blown up and then came back to make a fukin stupid amount of money from continuing to hold short.

From My Actual Life

5 years ago this same long January weekend was tough.

I tried to find the perspective in the stress. All turned out well, so don’t feel uncomfortable reading it.

Revisiting A Note From The ER

 

Stay Groovy

☮️

Moontower Weekly Recap

what are we supposed to learn to prep for the future?

Our local social club recently held its annual all-hands where we address housekeeping matters, re-affirm goals, and discuss event programming.

This is boilerplate info from the weekly letter I send to the club.

This is where I hosted the Financial Literacy sessions for kids last year. Feel free to copy and host your own:

Last night, we did our first salon of the year where members who were fluid with what’s happening in AI gave a presentation to the rest of us eager learners.

The topic of AI can leave people feeling anxious about the future. “What am I supposed to learn?” or maybe even more important to the members “what are my kids supposed to learn?”

This made me think of a recent interview I listened to with sci-fi author Devon Eriksen.

I’ll cut straight to the excerpts that relate (emphasis mine).

Interviewer Dan Koe: I want to start with that very first post of yours that I came across, and it was you responding to Yuval Noah Harari, like a clip of him saying that nobody knows what to learn because nobody knows what will be relevant 20 years from now. And then you started it with, “That’s because this dude doesn’t know what education is.”

That caught my attention immediately. And you went on to say this:

“In my opinion, the seven liberal arts of the modern world are:

  1. Logic: How to derive truth from known facts.
  2. Statistics: How to understand the implications of data.
  3. Rhetoric: How to persuade and spar persuasion tactics.
  4. Research: How to gather information on an unknown subject (practical psychology).
  5. Practical Psychology: How to discern and understand the true motives of others.
  6. Investment: How to manage and grow existing assets.
  7. Agency: How to make decisions about what course to pursue and proactively take action to pursue it.”

This will set us up for the entire podcast. So I want to start with this question: What do you find wrong with the current education system, and why are we not teaching what you call these liberating arts?

Devon: Well, the root cause of what is wrong with the education system is that a third party is paying for it. You know, we could go on all day sort of nitpicking the symptoms. But that is the disease. And when something is being paid for, the person who pays for it is the customer, and it is the customer who gets served.

So when you don’t pay for your education, when the government pays for your education through money that it has taken from other people, then the government decides on some level what you are going to learn. And you do not have so much as a veto power. Because if you pack your bags and go somewhere else to some other college, you’re getting the same thing because the government is paying for that, either through these kinds of education grants or through the Stafford Loan program. You’re not writing the checks, so you don’t decide the curriculum. And when somebody else decides the curriculum that you are going to be educated from, then they are going to give you the education that is going to make you useful to them—not specifically the education that is going to make you useful to you.

This is something that Cicero talked about when he talked about education. And I would highly recommend giving those bits of his writings a read. Because we don’t really have an organized version of what Cicero would have considered education.

What we call education today is mostly actually training, and that is the kind of education that in Rome would have been given to slaves. A slave is essentially a human machine. Where he’s property. He’s going to spend his whole life doing one task. So you give him job training. Job training is not education. It is preparation to do a specific task.

In that era of history, if someone was a free man, a Roman citizen with the full rights thereof, who could carry weapons and do all the things that Roman citizens could do, it was expected that he would probably need to be able to do many different things in his life because he would be acting in his own interest. He was not a slave. He did not exist to serve someone else. He existed to benefit his society, but also to serve himself. Hopefully, the two would align.

That meant that you couldn’t teach him everything he might need to know because you had no idea what he might need to know. He had no idea what he might need to know. So you taught him how to train himself. You taught him how to learn. Education is not about how to do a task. It’s about how to learn a task.

We do not have systematic education in this society, in the modern West, about how to learn and educate yourself, because the people who are determining what goes into education are really more focused on, “Okay, what’s going to make this person a useful worker for the moneyed interests that I actually serve?”

[Kris: Maybe that was a lot of words to say “specialization is for insects”. Then again, my money is on the roaches to outlast us all. Even better, cyborg roaches.]

 

Dan Koe: With that, it seems like agency is a massive part of that equation. The last art, so to say, could be the glue between it all. So in your eyes, what is agency, and what is the importance of it?

Devon: Well, agency is really the one most rare factor that determines highly successful people in life. You know, if we look at someone like Elon Musk, we can say, “Oh, he’s very smart.” And clearly, he is. IQ probably 150 plus. But there are lots of people banging around with 150-plus IQ—thousands upon thousands of them in the United States alone. And a lot of them are cloistered in academia. They come up with these sort of post-modern-esque papers. Or maybe they’re doing something slightly more useful, like physics. But they don’t get this magical effect where everything they touch turns to gold.

That’s because the bottleneck is not intelligence. Intelligence is only one of the things that is needed for success. It’s necessary, but it’s not sufficient. And intelligence is a very narrow thing. So what agency is, is the tendency to initiate action to achieve your goals.

And we don’t solve the world with intelligence. We don’t look at the world and think very smart thoughts and say, “Oh, I understand everything now.” That’s not how it works. Because when we look at the world and we think very hard, we get a few things right and we generally get most of it wrong. Then what we do is we try something, we have our guess, we test it. Some of it fails; maybe it succeeds, but usually, it fails. We refine that guess and try again.

So what applying raw intelligence to the universe is missing is that feedback loop. And what agency does—what this tendency to initiate action, this belief that you will eventually be successful, which is what agency is—what it does is it makes us willing to take risks. And it makes us resilient to failure. Because if you’re trying something that really is an achievement worth having, that somebody hasn’t done before, the first time you try it, you’re going to fail. No matter how smart you are. You’re going to get a lot of things wrong. So you have to keep trying again until you eliminate all of the errors from your model or from your plan.

You can’t do that with pure intelligence because intelligence is just the ability to analyze. It doesn’t give you data. It doesn’t tell you what the universe is like. So you have to go over and over again.

Ok, so I want to just emphasize the “feedback loop”. At our weekly family dinner with my in-laws we discussed New Year’s Resolutions.

I admit I was being quite tedious, but I kept pointing out how the way the resolutions were written, there was no feedback loop.

  • “Make the middle school basketball team”
  • “Shoot in the low 80s in golf”
  • “Write a 100 page story”

Here’s how you fix all of them:

  • “Alternating days: 20 minutes of dribbling drills/400 shots from various stations. Record percentages.”
  • “Driving range X days/week and putting drills Y days a week. Play 18 holes every week.”
  • “Write for 15 minutes every day”

None of these were my resolutions so I have no idea what the specific prescriptions should be, but I’m certain that the second set of prescriptions will have a higher likelihood of getting you to the goal. Because they embed a feedback loop.

If this reminds you of timeboxing, then you’ve been paying attention. It’s the manuka honey of productivity hacks. Score yourself not on the output of an hour but on whether you actually worked on what you said you would.

It’s so stupid simple and yet if you scored yourself this way do you think you’d actually be batting 1.000? If not, then you probably have a lot to gain from this shift in what you label a successful hour vs an unproductive one.

Ok, I’ll close the sandwich with another education bit. This is from my takeaways from Seth Godin:

What we have done in the last 50 years is leveraged everything. So, whereas in the old days of business might be able to go four or five days with no revenue because they didn’t own the bank, anything because they didn’t know the mortgage, anything. Now, if you want to compete, you need to have raised the money, to have run the ads, to have lower the price, et cetera, et cetera. So one business after another, big and small are leverage to their eyeballs. And we’ve done the same thing with education. That if other people are leaning into it, levering up, competing for scarce slots, it’s really easy for a parent to believe that balance will be punished. There’s no way to win that game against someone who’s unwilling to compromise. So what you have to do instead is play a different game. And you had to figure out what other agendas are available for my kids and my family…

If you talk to freshmen at Harvard, not one of them says they came to Harvard so they could get a job in finance. And if you talk to graduating seniors, they’ve somehow persuaded themselves that that’s exactly what they’re going to do. So what happened? Well, they’re not vocational schools in the sense that they teach you how to be an investment banker. But they are definitely labeling and finishing schools in the sense that they make it easy for investment bankers to know where to go, to get more investment bankers. The thing is that colleges that chose not to play this game got less famous. The ones that said you’re here to read great books, you’re here to explore what it means to be on the planet, you’re here to think deeply about meaning and philosophy and connection didn’t attract the same people to their placement office.

Which meant a signal went out to parents. And the signal was if you’re about to invest $200,000 or go into debt for something choose wisely and your peers will judge you for it. And so we created this capitalist driven ratchet that says money and success are the same thing. And that success means you’re a good parent. And success means you have a good kid and we’re defining that success in terms of money, but there are plenty of ways to make a living where you can be happy and make a contribution where the goal isn’t to make the most money.

The Moontower Subscriber Hoot

On Friday I tried a little experiment.

I opened a voice channel in our Discord called The Moontower Subscriber Hoot.

[Back in my floor days it was common for traders on the floor wear a headset to be on continuous conference with the traders streaming quotes upstairs in the office. At the fund, we also had an open conference line on our turrets to be able to talk to other traders on the team. I don’t know the origin of the term in the industry, but these conferences are called “hoots”.]

I wasn’t writing or working on something that needed deep attention so I figured why not open the hoot and chat while I tried to sell some TLT puts. [I didn’t get filled because I was cheeky with a limit a penny above the bid.]

I narrated what I was doing which I though could be a nice “over-the-shoulder” way to explain what I’m thinking as I do it plus enjoy the banter, something I miss from the old job.

Regarding TLT, I decided to toe into some bond delta with TLT being down more more than 2 st devs over the past month, more than any other liquid name in the Cockpit view.

I decided to express the delta through short vol as TLT vols in the belly of the term structure look attractive enough to sell on both our DASHBOARD and REAL view.

I chose a 35d put…skew is a bit elevated and the strike vol on the options were up a lot that morning.

ATM vol relationship to realized vol history

We talked about several other trades on the hoot and I got to explain a juicy rev/con trade that turned out to not be a real opportunity but people came away with a better understanding of how synthetic futures work!

In narration, the group was able to see how I use greeks to make sense of what’s going on in real-time. Makes a topic that seems abstract super practical and useful. For example, if I sell .30d puts at $1.85 vs stock at $65 and buy them back at $1.88 when the stock drops to $64.50 why that’s a big winner if I traded them delta-neutral.

You can also use greeks to discuss vol changes from tick to tick.

“See how the option is offered at $1.80 again 20 minutes later even though stock is a dime lower? The option only has a penny of theta, so it wasn’t erosion. It has a .30 delta and .15 vega so that means IV is down .2 clicks”

Overall a great experiment that I’ll make a trend. Not committing to a schedule but when I host them it will be on a Thursday and/or Friday.

A few weeks ago Nick Pardini had me on his podcast Analyzing Finance.

I know Nick from his days as a researcher for Parallax, we sat a few desks from one another.

It was fun to catch up. We cover options, volatility, and how options theory principles are found in all kinds of life or business decisions. The options stuff is really perfect for people trying to learn, it’s not heavy, and touches on a lot of practical questions around when you should consider using them or not and why volatility behaves the way it does.

Stay Groovy

jokers everywhere

It’s been a heavy week. I wrote more up top here so Money Angle is just one section today.

First, here’s one small thing you can do to not feel helpless.

https://x.com/khemaridh/status/1878140050778870176

Khe lives in LA (not in the fire regions) and our families both have seen too many pics from friends in affected areas.

Living in the Bay Area you hear your share of fire anecdotes ranging from the Oakland Hills fires in the early 90s to the fires in recent years north of SF. A friend of mine was a top official in Contra Costa County Fire and I’ve listened to some harrowing stories including a time he called his wife from a fire battle on a local mountain with the “I want you to know I love you and the kids”. CA firefighters are a badass breed knowing full well what they’ve signed up for.

There’s a lot of finger-pointing already and the fires aren’t even close to being contained. Getting to the bottom of the pile to find the ball when this is over (sorry to even minimize the current moment with a “when this is over”) is gonna be an ugly mess of scratching, eye-gouging, and nut punches.

If you live here with your eyes open you can see how CA is a devil’s bargain. When I sold my house in 2020 it was under a red sky. PG&E was in the news. Large chunks of people’s net worths being uninsurable just didn’t strike me as sustainable. I was wrong because all home prices did was go up since then.

[Contradicting that thought is my simultaneous hunch that a major natural disaster would super spike the prices of remaining homes when the demand to build devours supply. I thought a widespread disaster in the congested area would have come from a faultline.]

Nothing’s changed. Insurance math ain’t gonna math unless the kindling is cleared. This is a good thread on some ground truth. It’s comforting because physically there are possible solutions. Realistically, it’s TBD. To be doubted.

California’s troubles run generations deep.

1988’s Prop 103 kneecapped the insurance market’s ability to find clearing price for the risk. So the risk is socialized. And when risk is socialized it’s there’s less incentive for its true owners to internalize it. If “crabcakes and football is what Maryland does”, California is sunny weather and price distortions.

Prop 13, enacted the year I was born basically granted landowners a call option on inflation while wage earners were left short convexity via state income taxes required to feed the beast effectively subsidizing landlords. This is not “unintended consequences.” These were obvious second-order effects. Great job all around, direct democracy.

[A side note: I’m not unsympathetic to seniors who don’t want to be displaced because of property taxes but there can be targeted programs for freezing taxes beyond a certain age. But even absent that, you have to look at the problem holistically and in the counterfactual. If you don’t have Prop 13 distorting the cost of living here, people would be forced to plan better. Ya know, like they do in other states. I don’t know enough about what I’m about to say but my guess is the closer the tax receipts are to where people actually live the better aligned elected officials are to the constituents. That compliance usually prohibits hedge fund employees from donating to local officials but not national candidates affirms that intuition. In compliance’s case, the stronger influence is a bad look. In general governance though, it’s better.]

In any case, it’s hard to focus on what happens once the patient is no longer in shock. It’s easier to just fall into the loop…what would you do if you lost your home, your kids lost their school, maybe you didn’t have insurance?

Even if you have insurance it must feel overwhelming. I was chatting with someone yesterday about how 8 years after the Sonoma fires there is so much that is not rebuilt. And that’s not even an urban area.

What if your house is still standing but your neighbors’ houses are gone? At that point you might want to start over somewhere else but your put option didn’t pay out. It makes me think of this dark bit of humor. “My family!!!!”

5 years ago we were, without knowing it, heading to a lost year or more. The fire victims are staring down a similar barrel. The New Year’s resolutions scribbled a week earlier. Literally gone. What’s the difference, no time for that now. Got a full plate for the next million hours just to get back to stable.

[As a matter of commiseration it’s not helpful to relate a story back to yourself. I have no idea how these people really feel. But I’ll share that my apartment burned down in college. Thankfully a roommate noticed the smell and quickly got us to knock on doors…realizing that nobody knew where the smell was coming from we evacuated across the street not knowing what was going on. Until I saw the flames burst out of my bedroom window on the second floor. The fire was in the walls, starting from the take-out joint’s oven below us.

We were fortunate because both the university and Red Cross were able to quickly get us cash and concessions on due dates. And most importantly a friend housed and fed a bunch of us for days as we tried to secure apartment leases elsewhere. Despite the experience, I can’t fathom what it’s like to go through anything like this with your own home and when it happens to everyone around you. But I suspect even small gestures will go a long way.]

I can’t find the link now but someone who lost their house in Hurricane Milton wrote a good thread about how confusing it is. It can take a while to be allowed back to your site (I still remember the day we went back to the building and it does stay with you. And again that was small potatoes). The person explained how you collect little bits of info from everyone as nobody can see the whole picture.

Embodying what it must be like every day for the foreseeable future will hopefully focus the rest of us on being useful right now. But yeah, we are going to need to learn from it.

I hate to say it, but I’m not optimistic.

I don’t wanna be a drag every week in this letter so maybe I just get it all out now so I can get back to sharing educational things.

An unpleasant musing

The “algorithm” knows you can’t hate someone so vastly different from yourself.

Our deepest hate is reserved for those similar enough to remind us of ourselves. You find the Taliban, serial killers, and cartel bosses disgusting but they are too far to hate. They didn’t betray you. You were never on the same team.

If 9/11 were to happen today, would we unite?

Not if the algorithm is in charge.

This leads to a haunting question: is Twitter/X or whatever social media you look at real life? The line feels blurry even when I’m “touching grass” with people in meatspace. I’m increasingly noticing convergence between socials. Which makes sense. If the meme works there, copy it here. (Related: playing video games with my son has made me more aware of Twitterisms that are really gamerisms because there’s no way he would know them otherwise). The “memes” start as compressed thumbnails of an idea until they gradually terraform its host’s personality.

Luigi as a vigilante is a meme. That arsons might plausibly be flaming the original fire feels like it’s coming from a similar place. The Joker is here. I’m not here to point fingers because as wrong as the Joker is, as unjustified as his actions are they start with pain. Explaining the source of pain will never justify the evil it produces, but pretending it’s gonna just go away is begging for the spiral to accelerate. And we are so far from addressing that pain.

Hey, but I hear SPX earnings are expected to grow 15% this year.

Is Twitter real life? Elon says it is. He says it’s the media now. The truth. Ok, do you know what the “truth” is telling us? It’s telling us you have two years to get rich because capital, not labor, will be all that matters. That soon enough as quickly as you can imagine it an AI army will build it. You just need enough capital to pay the electric bill.

For people who still put gas in their car, this sounds like a death sentence. And if you shrug and say, “Well, it’s the truth,” then okay—Jokers everywhere. Don’t be shocked.

Positional Scarcity and the Human Condition

The accelerationist dream of post-scarcity is a fantasy. It sells itself on utopian visions without addressing the reality of positional scarcity. Status, sorting, and competition are zero-sum. They don’t vanish, even in a world of abundance. These instincts are baked into the human condition.

Nature reminds us of these instincts. My kids have been home sick much of the past week as the plague gets traded in our house like Pokemon cards (this is also weighing on my mood. Sick kids are not themselves and it’s sad, pathetic sight). TV has been on a lot. We were watching a nature vid of male humpback whales chasing a female trying to protect her calf. The males all wanted to do the “humpty dance,” but the mom wasn’t interested in Irish twins. The eventual victor was the male who escorted her to safer waters, perhaps hoping she’d “repay” the favor. The narration projected human motives onto the whales, and as awkward as that felt, it refreshed my sense that our capacity to trade, to make mutually beneficial exchanges, is what holds us together.

To situate this capacity truthfully we acknowledge the tense contexts. There’s social Darwinism. Life is competition. As I alluded to earlier, this remains even if we solve hunger. But we also cooperate at least at the tribal level. “Tribe” encompasses many scopes. “America” itself is a tribe that contains many tribes. And one tribe that encompasses even “America” is civility. A tribe that believes in inherent human dignity. It’s an ideological tribe. It’s from that tribe that we sense the trade-off between equity and efficiency. Efficiency means it’s important that our surgeons have proven their steady hands and sound minds. Equity means we don’t throw handicapped babies in Lake Tahoe. These are the outer boundaries of the tribe’s beliefs. Within the boundaries, “reasonable people can disagree”.

What’s happening right now is confusion about the boundaries and whether being part of the civility tribe is even desirable. The tribe is very large. Almost everyone starts within it. But the Joker is outside it by choice. Because of the betrayal of either boundaries or usefulness.

This is colliding with another human impulse.

Just Because

Humans do bizarre things. Flip through the Guinness Book of World Records, and you’ll see countless examples of this: we set records “just because.” Why did you climb the mountain? Because it’s there. Why do you want to go to the moon? Or Mars? Why not?

There are instrumental answers to these questions. Justifications or rationalizations depending on your own leaning. But they are beside the point. It’s gonna happen because humans gonna human.

Injecting some chaos and mutation into an evolutionary system is natural. If we survive it, it will turn out to have been species-level adaptive. We stand on the cusp of great acceleration. People trying to literally cure death. The stakes feel massive. Like humanity forking. The rhetoric sounds like something someone committed to the tribe of civility would say. We “need” to do this.

But today and increasing so…

…when the speaker says “we” the listener doesn’t trust the “we” includes them.

At least not a version of them that is dignified.

The lack of trust doesn’t come because the speaker is evil. It’s because we know from experience that humans will do things just because they can. Steve-O is the kinda guy that would have been a Jackass for free. Curiosity drives us forward. But poison is the dose. Morbid curiosity is what we call an overdose.

Society is looking at a group of people at a party and thinking, “Should you be taking that much?” Some dude in the corner funneling beer is egging them on and the normies who have to wake up early to go to work say “You know it’s getting late, I’ve had a bit to drink and if I wait any longer I won’t be able to catch an Uber?”

Huh?

Bruh, don’t you know that Waymo never sleeps?

A thought that didn’t fit

“Just because” isn’t always “just because”. Doing anything unusual has an algorithmic incentive. My kids watch YouTube basketball channels constantly. I saw an episode where they were record-book maxxing. Just trying to set records for various things like “dunks in a minute”. These videos get tons of views, but I find something deeply unsettling about them.

Making money is a reasonable proxy for “created value”. But you’d have to be pretty far up your own rear to think that there aren’t people who have gotten rich destroying value via deception, excessive rent-seeking, or simply getting away with crimes.

But there’s a wide swath of activity (think legal grifts) that always has at least a few redeeming stories that end up whitewashing the whole enterprise in the eyes of its few satisfied customers. (The rest of the customers churn because grifts are usually short-sighted, constantly hungry for new marks).

And then you have things stuff like Mr. Beast videos.

I just don’t know. It feels really dark in the same way I couldn’t watch more than one episode of Squid Games.

Sure, people point out all the good he does, but here’s my problem: attention is zero-sum. Every minute watching him is at the expense of another entertainer who will recycle that income through the economy or charity. At a macro level, there’s no additional good being done here. It’s just more noticeable when it’s a single ticket.

Maybe this is my “old man yells at clouds” moment. There’s always been nonsense content. But when I see these videos, I feel like I’m staring into Palpatine’s horrific face: “Oh I’m afraid the deflector shields will be quite operational when your friends arrive.”

We’re entertaining ourselves to death.

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