To The Moon

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

I saw a familiar type of riddle on Twitter that was directed at fundamental PMs. I gave a lazy answer and later improved it with a better answer after my half-assed-ness gnawed enough at me. I’ll reprint the riddle and the better answer here but spelling out the steps in greater detail than I did on twitter. Question: Estimate the price of a $180 call (20% OTM) on a $150 stock with 50% volatility, 3 months to expiry 150 Call Calculation (The ATM option) We start by estimating the at-the-money (ATM) call value using: ATM straddle = .8 * stock price * implied vol * √(Time to expiry in years) ATM Call = .4 * stock pric

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 — 

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.

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

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

Last Sunday, I sent out a paywalled flash post explaining why I thought GLD November volatility looked like a sale based on Friday, 8/16 marks. The trade was still available on Monday morning. It was a good trade. [Unfortunately I didn’t do it myself and of course I’m cherry-picking by publishing this thread. As karmic penance, this week, I’ll write up a recent trade I did do that didn’t go so well] Let’s see what happened. First, I’ve now unlocked the full post so unpaid subs can also see the thought process Flash Post on GLD Vol but the tl;dr was the 90d or November expiry stood at as being expensive. Post-mortem after 1 week The November 232 GLD ATM call price ⇒ On Friday

Thursday’s paid post was cutting to the heart of vol trading — dynamic hedging to isolate vol mispricing. There’s a part in the paid section called A word on Option P/Ls that I’ll share here: On option P/Ls Once we strip out an option’s delta p/l, we are left with a “volatility p/l”. Volatility p/l has an implied vol portion and a realized vol portion. Vega p/l = implied vol portion Gamma + Theta p/l = realized vol portion We estimate the p/ls with the following formulas: Vega p/l = vega * vol change *contracts * multiplier Theta p/l = theta * days elapsed * contracts * multiplier Gamma p/l = 1/2 gamma * (change in stock)² * contracts * multiplier 💡See

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

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