Risk and Edge
This is part 2 to When it's normal to have no idea what your returns are Traders don't think about rates of return explicitly in the same way traditional investors or fund managers might. A trading firm is more like a holding company where each portfolio
I’ve been narrating my small GME trade this week through this substack and twitter. On Friday I rolled my short June 20 calls to the 25 strike. I narrated my thinking on twitter but I’ll re-print it here. It’s a combination of real-time thinking and some meta-thoughts
The lingua franca of asset management regardless of strategy is returns. But this is not necessarily true in trading. In my own 21 years of trading, it was never even brought up internally. It gets mentioned somewhere far in the background. In vague terms at best. And even then, the
Gather round. Let’s just chop it up in no particular order. On Monday, I fired off an impromptu email with a trade I was doing. Disclaiming of course that it’s not a recommendation. I have no licenses and I’m not qualified to give financial advice. Buyer beware
GME share price started the month around $11. On Friday May 10th, it closed $17.46. Monday it was about 80% to $31. Tuesday it climbed >50% closing at $48.75 before it would give back over half its gains just as quickly. In a twitter thread @DeepDishEnjoyer, a
Towards the end of Using Options Better, I promised: If you fit a regression line between vol level and put skew you will see that skew flattens as vol increases. If you restrict your sample to a regime (say to when SPX vol is sub 10%) that line will be
It’s going to shock you to hear it, but I get emailed a lot of option questions. I’ve gotten some that are pages long with commentary, prices, blood type. This is one of the reasons I put the shingle up for calls. I’m definitely not reading all
An option trader pinged me about a trade between a correlated pair of names whose IV ratio was trading at an extreme level compared to the ratio of realized volatilities that the pair has experienced in the past. This trader is experienced. He understood that pitting vanilla options against one
This week, moontower.ai announced several free option calculators with more to follow. 💡These are embeddable so you can add them to your own websites, Notion workspaces, or wherever you organize your insanity. One calculator that many of you might find useful is the Event Volatility Extractor. If a known
Car leases are said to be “an option to buy”. Put-call parity is the most important concept to understand about financial options. At the core it really means a call or put can be turned into a straddle. An “option to buy” or call is also an option to sell.
While a successful volatility trader’s edge is in discerning relative value between options, they are agnostic on the direction of the underlying. This is a niche symbiosis in the ecosystem of markets. The Egyptian plover that cleans the gluttonous gator’s teeth. The wider, active marketplace, with deeper pools
A reader asks: Do you have any insight into the activities of market makers when they act as authorized participants in the ETF market? If you ask the internet how market makers earn profits, the typical response is something like “by capturing the (bid-ask) spread.” I have always wondered how
My friend Rajiv Rebello has helped both my family and extended family navigate the complexity of insurance contracts. That world is coated simultaneously in both exploitive grease and heavy regulation. Rajiv is our white knight. Brilliant, honest, and experienced. He’s an actuary who help individuals find policies and understand
Know-Nothing Sizing We’ve been talking about how the market does follow the fundamentals you are earning a return because corporate profits are there. See prior posts: * What Drives The Stock Market * Nah…you just ain’t seein’ the ball I also discussed my own approach to portfolio construction (see
When a friend asks me what I think of investing in the SP500 I have a standard answer: It’s a broad basket diversified across industries including foreign revenue via multinationals. If the economy grows and companies make profits in the long run you should do fine. The next question
Friends, I saw this chart on LinkedIn and the call of mental math immediately lured me onto the rocks. Since 1972, the SP500 is up 250x. So what’s the CAGR (compound annual growth rate)? One can open the calculator on their phone and type 250^(1/52) - 1