Arithmetic returns Expected return for a bet is the simple probability-weighted average of outcomes. If there is a 50% chance of a bet making 21% and a 50% chance of it returning 19% this it’s a good bet that is also not volatile. You expect to make 20% on average (despite the fact that you can’t ever make that on any single bet since you can only earn 19% or 21%). Your expected terminal wealth after a single trial is 1.2x what you started with. Since we took a simple average of the outcomes we computed an arithmetic mean return of 20% Compounded returns For multi-period investing where we do not take any distributions or “money off the table” we cannot use simple arithmetic means to compute an expected return. Consider the same bet after 2 trials. These are the 4 possi

I recently built this cockpit view to see what’s going on in markets. I’ll be iterating on it as well as creating a page to incorporate my portfolio so I can do some high level bucketing by asset class, vol weights, and portfolio correlation. It won’t take much to get it to a suitable template for the personal account. I’ll probably add proxy benchmarks to mimic private fund holdings that hold public securities. However, there won’t be accounting for angel investments. I hold them at cost on the spreadsheet and at 0 in my brain regardless of their “valuation”. If anything hits, I figure my kids will thank me one day. If not, and I trained them well, they’ll drag me over the foregone beta return. They own a lookback option on our sense of guilt. That goes beyond finances I’m sure.

Equity markets have been crazy. In my caveman view, we just left a world where volatility markets were searching for vol buyers. The “job to be done” in options was to find a way to accumulate options without bleeding out. Selling had become too popular. At this moment, I suspect risk groups of discretionary capital have put yellow police tape on the option sell button. The market is now bidding for sellers so that’s probably the side that offers compensation. Do this at your own risk of course, shorting vol or anything for that matter is hard because it’s hard to time but also because it has diabolical math — if you’re wrong your losing position becomes bigger while your equity shrinks (when longs lose money the losing position becomes a smaller percent of your equity). Managing trad

Just popping in to share my notes on 2 books. The links go to my notes. More Than A Numbers Game: A Brief History of Accounting by Thomas King Advanced Portfolio Management by Giuseppe A. Paleologo I picked up these books because of an interest in the practice of “measuring correctly”. Context always governs what “correct” means. A quote by Paleologo the opens Chapter 8: Understand your performance The Earth rotates around the Sun at a speed of 67,000mph. When I go out for my occasional run, my own speed is in the tens of thousands of miles per hour Should I take credit for this amazing performance? I w

This is a cross-post from The Success Paradox I was going to write about how to measure implied skew. The post would also have been a nice demonstration of why I write about options stuff in the first place (hint: it’s not because I think you should be trading options). You would walk away from the post excited by a new insight but rattled because it would crack a door you’d definitely prefer to keep closed. The anticipation is a tad cruel because I’m going to table that post for next time. I didn’t feel like breaking up today’s letter with nerd stuff. Dazed and Confused transpires over the last day of school. Randy “Pink” Floyd ain’t doing homework in the moontower and I’m not gonna be the cruel teacher who’s gonn

Check $Nine Energy Service Inc.(NINE)$ before thinking of buying this.. if you are thinking of investing in $Houston American(HUSA)$ , $Indonesia Energy Corp Ltd.(INDO)$ $Imperial Petroleum Inc(IMPP)$ $Camber Energy(CEI)$ .. think twice... of all the oil related stocks, going up, none of them doesn't have solid business like Nine energy.. due to covid their revenue reduced.. but their last quarter revenue way above analyst expectation.. Their 2022 guidance is huge.. With rise in oil demand, it is poised to rocket this year..

This post starts with a response to a reader question but leads to a deeper question — do arbitrage-free prices present opportunities to fundamental or directional investors? One thing I’ll be doing more of is sharing my answers to reader questions. Here’s one that channels a topic that eternally confuses option investors when they learn about skew (emphasis mine): In your excellent article Lessons from the .50 Delta option, you wrote that by bidding up the put skew, the market makes call spreads more expensive. Combining this with your insights on the deeper understanding of vertical spreads, implied distributions, and thinking of spreads as odds, I was left wondering how the steepness of the skew relates to ou

Lots of fun stuff to learn today about options. Jumping right in. GLD and USO On the weekend of August 18th I pointed out that GLD ATM vol looked expensive as of the close on August 16th. I wrote about the setup and the performance after a week in the following posts respectively: Flash post on GLD vol (8/8/24) how many coin flips until your goal? (8/25/24) I did not put anything on myself as I prefer to stick to trades where my vol lens and directional bias overlap. I have no opinion on gold. It’s a small part of my overall asset allocation as is other crap I don’t understand like BTC and ETH. If my well-being in life ever r

This is a cross-post from Using Insurance For Tax-Free Investment Growth written in Nov 2021It’s broadly expected that income and capital gains taxes will increase, especially for high earners. It’s a waste of time to speculate on the specifics but Matthew Hague has a handy summary of the largest proposed changes. If you are a high-earner in CA or NYC, you’re looking at all-in income taxes well north of 50% as well as an increase in capital gains taxes. Naturally, you want to know what tools are available to minimize the tax burden. In this post, I will relay what I have learned about insurance as a tool for allowing investment returns to compound tax-free.I’ll start with a caveat. You should be skeptical.A common impression of

One of our pro subs sent us a note this weekend: Subscriber update: I’ve had a really successful first month with my moontower built trades. I’ve just been buying cheap vol verticals and diagonals, time spreads and selling expensive credit spreads, fine-tuning with the skew screen, playing the macro uptrend. Been helping me see the surface better, especially because never knew how to look at the surface before. Same with skew. This is my novice approach (8 year experience, retail). Thanks for constantly improving the site. A challenge that we totally anticipated in opening moontower to subscribers is retail options trading tools are incentivized to dumb down options. We are always trying to balance the challenge of simplification with the reality of options — 

Note: This is a trade I’m looking at. I’m not an advisor. I get hunches, I cross-reference them with pictures I have a hand in creating, I fire and then I go back to writing, tinkering, and ignoring what the world tells me to look at. Anything that rattles in your brain from my thoughts or existence are at your own damn peril. WTI has given up all its gains for the year after falling the last few months and another 3% Tuesday after OPEC revised demand growth estimates lower through 2025. Commodities are telling a bearish story for the world economy. The BCOM index is down 5% for the year and over 12% from its May peak. There’s a risk-of

Just based on my local observations, it still feels like the bid-ask on residential real estate is wide. I wrote Staring Out The Window in October 2022: Musing #1: Bid-Ask Widening A year ago the people that paid ridiculous prices for RE were market orders. “Fill me at any price”. Many of them were immediately in the money (ie they probably could have turned around and sold a month later for more. Maybe not net of transaction costs but you get the idea). This isn’t shocking. When optimism turns to euphoria, the rate of change of the returns themselves can explode into a parabolic curve. Of course, such curves are unsustainable. The smug moment of being in the money is short-lived in the same way that a fund tha

SIG’s Todd Simkin went on Ted Seides’ Capital Allocators podcast recently. I’m biased but Todd’s interviews are some of the best you’ll find in finance (also SIG interviews are rare to come by). Come for the discussions of risk and trader education, stay because his personal stories are highly thought-provoking. My notes on his prior interviews are some of my most-read podcast summaries. Notes From SIG’s Todd Simkin (35 min read) 5 Takeaways From Todd Simkin on The AlphaMind Podcast (11 min read) I didn’t do a full breakdown of this one but I’ll point you to a few key parts. Ted asks, “When someone’s learning and