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2 Mar, 4 tweets, 1 min read
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...
But they wouldn't get to pretend they have the moral high ground even though the economic result is the same.

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More from @KrisAbdelmessih

Kris Profile picture
3 Mar
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)
Read 8 tweets
Kris Profile picture
3 Mar
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.
Read 15 tweets
Kris Profile picture
2 Mar
I was going to write a post similar to this but from a different angle. I'm not going to get around to doing that but I'll share the gist...
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.
Read 15 tweets
Kris Profile picture
26 Feb
I'll share some of the questions I got back in 1999...
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)
Read 9 tweets
Kris Profile picture
7 Feb
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.

So if you are running a hedged position...
Read 11 tweets
Kris Profile picture
27 Jan
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
Read 5 tweets

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