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)
moontower today was triggered by an insightful comment by @ScottPh77711570 on @choffstein podcast
Excerpts...
I fired up Corey Hoffstein’s goated Flirting With Models podcast to hear Scott Phillips discuss “ugly” edges in crypto. This episode came highly recommended in my corner of twitter. It does not disappoint.
But I want to zoom in on one part. Scott says:
I’m repetitive on log and compounding math for 2 reasons that extend beyond the shock factor of the “lilypads in a pond” puzzle:
a) Investing is a serially repeated game so compound returns are our primary concern
I haven't actually done this explicitly but I could imagine some model where you solve for how many negative carry days vs speed to revert to say some vol target and set the p/l path to zero to solve for how long the market thinks it will take to resolve to a normal vrp world
It's not a real model, too many cross influences between the paths, but just framing it like this sharpens your thinking. Fuzzy "it'll go down eventually" is probably so consensus that my guess if I knew nothing else the vol is underpriced
If they ban short-selling derivatives become the underlying
A reminder in the spirit of being attuned to seemingly far-fetched risks:
If short selling were restricted in any way, the value of puts relative to calls on the same strike increases in a put-call parity framework.
Another way to say this is being long stock is more valuable since only long sellers can sell. If puts increase relative to calls on the same strike, as they do when borrow costs increase, that is like a synthetic future on the stock trading at a discount to the stock price.
A little thread of fun intuition for option probability based on yesterday's letter
A couple weeks ago @dampedspring posted:
By saying I’d buy that proposition I’m saying “I’d buy that vol”
Andy, responded with a joke about what’s the “one touch” option worth, which I asked him to delete because I really would have liked a fool to sell me that proposition and Andy’s comment gives away the sauce.
[X’s killer app would be to escrow bets, but that’s another convo altogether]
I’d be a size buyer of a 50% probability that we get back to the highs before the end of the year.
I narrated some of my IBIT trading last week streams. Expiration on Friday went well but I want to zoom in on the experience broadly because it’s a classic flow of what vol trading looks like...
Just for recap
But that masks the process and experience. Let's start.
Initial Trade Setup
I liked selling near-dated IBIT vol while buying extra teeny options in the second month for a calendar spread.
I was out Monday night in SF with friends from Parallax and we realized it’s been exactly 4 years this week since I left. I gotta tell you, while I don’t miss having the job, I deeply miss the people.
I deeply miss being an office (although I don’t miss the commute or the 4am mornings). I reference the film Clerks all the time, but my professional life felt like Clerks.
Non-stop banter, friendly debate, and just sharing highs and lows on this little rowboat that we were all paddling in the same direction. Clearly that wasn’t enough for me to stay. The work itself felt stale and my heart wasn’t in. Nobody’s fault. It’s just a me problem.