More ruminations on what trading can teach us about non-trading things. A thread...
Recently reading @SinclairEuan's excellent "Positional Option Trading", and he reminded me of something I hadn't thought about for a while:

Great trades start with a known risk premium and then add idiosyncratic inefficiencies on top to get more alpha.
The risk premium is a long-term thing. The vol premium or the carry trade aren't going anywhere.

But you can't really build a business on them alone. Too many people know about it, so returns are at best "ok" (i.e. low Sharpe) but with terrible tail behavior under stress.
You need the extra juice from finding relatively short-lived inefficiencies to make it a trade worth doing.

This is why trading is labor-intensive: you need to keep improving your edges because inefficiencies disappear.
The insight in this thread isn't a huge one, but rather a different window on something we all know:

Many non-trading situations can be broken down in this exact same way!
In the angel and VC investing world, most of the investment decision is made on the basis of the people involved.

Yes, you need a good idea and a good plan, but the most important piece are the founders.
Another way of saying this is that the founders have identified their risk premium: the long-term durable thing they're good at that they'll probably be good at their whole lives. Sales, or developing good tech, or whatever.

But like in trading, that's not enough.
You also need the inefficiency: the small insight you've discovered about the world that others have missed. The reason that *this* business exists and not some other.

These opportunities are short-lived, so you usually need to act fast.
In venture-land, a good investment is one where where the people are the right people (the risk premium) and the immediate business case is solid (the inefficiency).

But wait, there's more.
In deciding what to study in university, or what job to get afterwards, the same calculus applies.

The risk premium is the thing that you *love* doing, something you're interested in for its own sake.

Irrespective of how much you could make doing it.
And the inefficiency is the specific job situation you can find to exploit that risk premium.

A lot of the time, the two don't come together. Sometimes we get a job because it's available, even though it's not what we *want* to be doing.
And so we end up at best satisfied with the job, and at worst hating it. Makes sense: you're doing crappy trades with your life.

You always hear the career advice "follow your dreams". This is terrible advice.
It focuses on the risk premium and ignores the fact that, to make it a success, you're going to have to grind away to develop those exploitable inefficiencies.

Just like in trading. "Follow your dreams" is like "Just go sell vol".
Yeah maybe, but you'll probably have to work really hard at it. If you want to make it a success.

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More from @AgustinLebron3

4 Jan
1/ Options 101 (a thread):

When you teach options, they put you in jail if you don't start with this:

A call/put is the right (but not the obligation) to buy/sell a security for a given price at (or by) a certain time. Boring! Let's do an example:
2/ If I own the Mar 700 call in $TSLA then that means anytime before ~5pm on Mar 19 2021, I can exercise my right to buy TSLA shares.

I hand over $700/share and I get some TSLA stock. First let's note a few things:
3/ US equity multipliers are typically 100 (barring corporate actions). So when you buy 1 options contract (call or put), you're actually buying the right to 100 shares.

Remind me to tell you the story of when I messed up the DAX multiplier. I was *sure* was going to get fired.
Read 56 tweets
25 Jul 20
Had a long think about things @KrisAbdelmessih and @VitruviusCurve wrote this week. About ML in trading.

The levels of quant trading:

0. Fumbling around in the dark.

Most people stay here forever, and even those who progress past this level still revert to it with annoying frequency. :)
1. Does +EV trades.

Has figured some things out, can do good trades and know they're good in expectation. This is a hard level to get to!
Read 7 tweets

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