Labor wages are less volatile than asset returns are only applied to a flow variable...income.
Asset volatility is applied to a stock variable...wealth.
Ok let's consider utility of wealth for a moment...
Whether you want to attribute it to behavioral loss aversion or non-ergodicity (ie we intuitively maximize geometric returns) the outcome is the same:
We have concave wealth functions.
What does that mean? It's just diminishing marginal utility of wealth. $100k does not make you 10x happier. Maybe 25% happier (ln10k/ln1k). Every additional 0 changes your life by less. You only need so many Lambos.
The exact slope doesn't matter. The function is concave.
Now consider our prospects for increasing happiness.
We could work longer to reach higher wealth levels but since wage variance is small our prospects for increased happiness is linear with respect to hours worked.
Boooooring
However as asset volatility increases, the distance to a higher level of happiness shortens.
It's the same phenomenon as OTM call strikes becoming higher delta as you raise the vol.
And this shortening occurs on the asset plane not the hours worked plane.
People can feel this.
I know several people who earn solid pay (low 6 figures say) that have seen massive increases in their net worths in the past year as a multiple of what they could normally save in a year.
It is leading to people questioning the value of their time.
Why fill cavities when I can "study" markets and make 5x in my underwear.
People are noticing the volatility and seeing it as an elevator. Fck the stairs.
My unscientific feeling is that this feeds on itself and leads to more speculative behavior and more inflow.
But if the elevator is obviously so fast other people are gonna jump the stairs and get in line for the express too.
So you now need to figure out how close you are to the front of the line and how big that elevator is.
The promoters have figured out how to skip lines and get multiple trips before the stores close.
Financialization is just their latest tool. Would have been chemical elixirs if it was a prior time. The method is the same, the medium is different.
Every mistaken ticker or NFT is a potentially faster elevator. The promotors see the volatility as speed.
But if everyone takes elevators before the stores above can restock, before they can deliver, word will eventually make it's way downstairs.
People will get off the elevator lines since there will be nothing to rush to. The shelves have been emptied up above.
Might as well take the stairs and let the stores replenish.
Give your legs a workout. Don't let this frenzy hollow out your muscles.
Promotors want you to love financialization. They want desperately for you to believe this is the real world.
And some, maybe much of it will be. But as prosthetics to humans that actually live in communities. Sustaining and trading skills with each other.
I can't tell where the trend following ends and the believing your own BS begins.
And the best promotors believe their own BS bc that's how they became the best promotors in the first place.
Financialization and its ripples are fun. Just unsure how big the warning labels should be.
Volatility is a siren's call. It'll be easier to tie yourself to the mast if you don't look around. And if you choose to look anyway, know that the elevators eventually lead to nowhere.
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An example of thinking about wanting to be long options where the stock ain't going.
In my PA I might consider stock replacement. Not ITM calls though. OTM calls.
Why?
The first thing most might think is "steep upside slope"
That's not exactly what I'm thinking.
US large cap is expensive by every measure. Fine. Well Meb Faber said Japan went to 90 p/e. The market could 2 to 3x from here on flat earnings. Falling behind on that would suck. Not acceptable. Wealth effect would mean I could never afford a house in that world.
Still...
That's not really the driver of the trade expression. It's that given the valuation I'm ok missing a 10% rally say but if the market rolls over there's my actual win condition.
Not being overly exposed to the sell-off (I know stonks only go up)
A thread about directional edge vs carry based on a convo I had with a younger trader.
His strategy was to sell options when IV was in the 100th percentile. What are some problems with this?
The most obvious is that 100th percentile depends on your lookback window and the relevance of that window is I don't know, arbitrary. The historical distribution of IV does not need to have any relevance with respect to qualitative information you have today. (Umm, GME).
Here's another issue.
Any day when vol goes up after a 100th percentile IV day is just another 100th percentile IV day.
The next day given, that you just hit 100th percentile yesterday, just doesn't care that yesterday was a "top" compared to the days that preceded it.
Watching finance/tech moguls who have ridden govt-sponsored near zero cost of capital to multi-gen wealth not answer the door when the govt comes back around looking for a wealth tax rebate
Don't get me wrong it's a bad idea...but strictly for practicality reasons. Not for some ethical or other made up incentive theory. We haven't cared about sht like that since GS was made whole on AIG CDS, entrenching TBTF, and favoring monetary over fiscal until a pandemic hit.
Next time the govt buys assets to stimulate the economy it should also buy a lookback option from the asset sellers. Then we can say "look you knew the rules before you took the money". They still would have signed up bc people love to sell options too cheap...
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