a quick little trading inspiration..

track the implied delta of the >90 market on poly compared to the corresponding futures price by tracking its price change.

For example if the market went to 75% on a $1 rally then it's a .02 delta... If implied delta is larger than the delta of a tight call spread around the $90 strike that's an idea for the type of thing you can make markets in.

This is going to be hard but I want a list of the top 3 in each of :

1. books
2. podcasts
3. blogs

you'd recommend for thinking about risk/reward/decisions

Imagine you are hiring a novice trader Mine:

Books

Laws of Trading (@AgustinLebron3 )
Superforecasting (@PTetlock)
Fooled By Randomness (you know who)

GLD vols in pics...

🌙Excerpt from today's letter:

Here’s how I describe the set-up:

1. The destabilizing moves are higher. The market-maker and hedging community get shorter vol as we go up.

2. Market-makers aren’t stupid. They literally saw this movie a few years ago and if you think SIG doesn’t have the “run Softbank vol surfaces” button in their cockpit, trained on the 2021 flow signatures, then you must also be puzzled as to why the market-makers are making unprecedented piles of cash trading…

Asset prices climbing a wall of worry -- vols look broadly expensive compared to daily sampled vols.

Guessing they look cheaper relative to weekly sampled since we've been trending

Shorting vol = long beta; tough diversification setup

(Although oil has been 🚽) Trimmed some hard deltas a month ago and trimmed also via soft deltas (buying puts in SMH)

Buying puts was the better play

Why?

1 month puts for 28 vol correspond to a 1 month st dev of 28/sqrt(12) ~ 8%

We've moved 16% in the past month

Let's actually understand the meaning of vol drag.

This week I explained that while meme stock put spreads "look" expensive, there's a good explanation.

High vol affects the skewness of a distribution -- it shifts the median return lower... But the thread I wrote bounced all around the internet but like a nerdy game of telephone the message is suffering from major info loss as it gets passed on.

What you need to remember:

Just an opinion...

Gonna put JS index expiry manipulation aside. It looks bad and if that was their intent it is bad.

But regarding the strategy where they sloppily buy deltas to turn around and sell option combos at artificially pumped prices... The antitode is for the losers is to
realize that they aren't entitled to overestimate how much liquidity “last sale" represents

I mean as a market maker you are taught not to provide more delta liquidity in the options than the underlying so this isn't some profound suggestion

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:

Kris' point is an instance of a wider tension. I call it distributional edge vs carry

The sellers believe they have distributional edge but the cost to hold the trade is carry (here in the form of roll-up).

blog.moontower.ai/distributional… x.com/Ksidiii/status… 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

Quick thread extracted from today's letter

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.

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.

On "surfing volatility"

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

Threading today's letter...

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.

Stock up, vol up

best performers relative to their vol in the past week

germany, FEZ, euro

so...immediately your instincts should make you ask... did the put skew invert?

spot down is stabilizing to vol relative to spot up

looking at the May expiry (closest to 60 dte) the 25d put skew is 75th percentile (1 yr lookback) and the a 15% premium to at-the-moneys

Procrastinating a bit this am so here's a thread based on today's letter.

@AFwithNick and I chatted back in Dec and he asked:

Isn’t every life decision essentially a vol trade?

I did the thing where you re-frame the question to one you prefer to answer... What can option theory teach us about decision-making in general?

My response started:

I'm gonna piggyback off some of my training. I started at SIG, and famously—or infamously, at least in our little world—

I just finished @justinskycak book The Math Academy Way.

One of the coolest concepts is the interplay between spaced repetition and compressing what you need to review by understanding the linkage between concepts.... He explains the difference between an encompassing graph and a prerequisite graph. You are already familiar with the latter. The former whoever is not the mirror image. You may need to know X to learn Y, but by reviewing Y you may NOT have implicitly reviewed X...

First tagging @moreproteinbars for the QT chain

Ok

worst trade: short ng futures vol vs long ung when UNG put a moratorium on creations. ETF went premium to NAV. When gas futures dropped UNG didn't move. Premium widened...

https://twitter.com/bennpeifert/status/1875523992767099345

When gas futures rallied UNG also didn't move. The premium just narrowed. I was short options on the thing whipping around every day and long options on molasses.

(This happened in 2011. The experience prepared me for connecting dots quickly in 2020 USO)

Yesterday I published Path, VIX, & Hit Rates vs Expectancy

I'll thread some of the free portion... We start with VIX.

The CBOE’s VIX index interpolates 30-day implied volatility based on options struck on the SPX index.

A VIX future settlement price is based on the prevailing VIX index at the future expiry date.

Thread version of a post called:

why selling an option because the “stock will never get there” is amateur vol thinking In stepping through an oil put trade, I wrote:

As a junior trader I remember selling calls because “it’ll never get there”. I promise you there are many people who think like that. They don’t understand vol trading.

This post is fine, reasonable posture.

...but if I may piggyback off some of the numbers in the post...

I want to repeat what the post says but with slightly different emphasis which leads to a large difference in framing.

https://twitter.com/awealthofcs/status/1845094855560638657

For example, it talks about people being in the top 5% of income or wealth being disappointed and you'd be better off having going in with lower expectations.

When I think the harsh but true reality is being in top 5% when you measure against the whole population just...

Yesterday I unlocked a paid post that might have broad appeal

a deeper understanding of vertical spreads

thread version... In part 1, we tackled a common problem without the use of an option model:

Assume SPY volatility is 16% and we want to hedge using a 1-year put.

2 questions emerge

✔️What strike is 1 standard deviation down?
✔️What’s the cost of that put?