You flip a single die and will paid $1 times the number that comes up. How much would you pay to play?
Suppose I let you take a mulligan on the roll. Now how much would you pay (you are pricing an option now btw)?
My batting avg is higher than yours for the first half of the season. It's also higher than your for the second half of the season.
Is it possible your avg for the full season is higher than mine?
(Simpsons paradox)
You are mid game that you have a wager on. Opponent offers to double the stakes or you automatically lose. (like the doubling cube in backgammon)
What's the min probability of winning you need to continue playing?
Your down by 2 with seconds left in regulation and have a 50/50 chance of winning a game. You have a 50% 2-pt shooter and a 33% 3-pt shooter.
Who do you give the ball to?
(simple EV question)
You are given $1,000,000 for free but theres a catch. You must put all of it into play on roulette.
What do you do?
There's a 30% chance of raining Saturday.
30% chance of raining Sunday.
What's the probability it rains at least one day?
Some risk tolerance stuff...would you bet $100 on a fair coin if you got 6-5 odds? How about $1,000?
(Just trying to see if you understand how bet sizing/edge/bankroll work. Kelly answer would have been the A+ version, but really was looking to demonstrate that you were sane)
Publishing an option post today that emerged from writing Moontower this week. It's about a qualitative intuition for option behavior esp spot/vol correlations.
Option greeks esp as you get into 2nd order ones like gamma, vanna and volga often cause a listener to slow down...
They say "ok, wait what's gamma again...[start recalling some if...then scenarios]"
I have 2 quick heuristics that can make the effect of a vol change more clear especially if you imagine an extreme change in vol (so if your scenario is "vol down", mentally crank it down to 0)
Heuristic
1. "Further away heuristic"
If vol goes down, all OTM options become "further away". The effect on greeks is obvious. Just imagine the extreme as vol goes to zero. All the greeks go to 0. Deltas and second order greeks.
Position sizing and enabling leverage are too big relative to the presumed liquidity.
A question I don't see being asked is what factors are contributing to the presumption of liquidity?
(Same thing as underestimating risk, and WSB stumbled on a soft spot in assumptions).
Another way to think about it is perhaps how much is reasonable to short should not be a function of days to cover type metric but how much liquidity you could have gotten to cap the potential loss by buying OTM calls (or how many deep puts could you have bot instead)
In other words, the price of hard optionality instead of a risk mitigation strategy that looks like portfolio insurance in the opposite direction.
Underestimating gap risk. It always come back to this. It's always there even if you couldn't predict the tendie form it would take
With all the blatant coordination on WSB, this part of Chris's post hints at how pros communicate non-verbally. They are aware of how their actions are perceived. They assume the other pros are smart and can project the correct iterative strategy for the pro ecosystem to win...
Assuming the pros have settled into an equilibrium where they know which other pros are not going away.
Option market makers do the same thing. They understand how cutting a market affects future transactions. Dynamics can entrench without anyone saying a word.
MMs have tools for embarrassing brokers or other market makers. They might incinerate money to do that in hopes of changing the future dynamic and keeping the predator community honest so that nobody's share gets too out of balance.
Just wrapped a 3 hour drive back from Tahoe. Listened to the December @LeitnerJim interview on MacroHive that led to some investing strategy discussion with the wife. Here's a bunch of random thoughts from our chat and the pod...
My favorite idea from the pod: the discussion of replacing equity allocation with digital calls. He talks about buying say 5 year 100% OTM digital for 7 cents on a dollar. You should listen for his full reasoning...
It rhymes with Warren Buffet's thoughts on option pricing which is ultimately the difference between no-arb risk neutral derivs pricing and odds implied if you believe in an equity risk premium.
Floor trading and fintwit share an overlapping dynamic
"cooperative competition"
It'll be fun to lay out some basics of the floor trading ecosystem and you will spot analogies.
First an fyi.
The floor gave traders what was known as "time/place advantage". It was the first place an order became public if it was not an electronic order.
Let's classify the traders on the floor:
"Locals" and prop firms
"Locals" are independent traders.
They trade their own money and secure the right to trade on the floor by owning or leasing one of the limited seats which represented an ownership stake by the exchange's "members" (this was before demutualization)
For those of you looking to begin expressing creativity don't be scared.
1. Everything is a remix 2. You get better with practice 3. It's ok to start by copying (not plagiarizing)
The single most important thing to remember is that 1 pushup is harder than 50. So get unstuck...
I wrote this post earlier this year and it seems like the one to share for the resolutions and new beginnings crowd (I'm married to someone who gets excited by getting a new spiraled planner so i understand you folks).