moontower: a stoner dad explains options trading to his kids

Programming note: In honor of Labor Day, Moontower will not labor this weekend. Consider it a break for your eyes. See you next week. Friends, Options are surgical tools. If your thesis is simply “I want to be long,” just buy the stock. An option turns your directional view into a parlay with time. That said, if you do choose options, this post is about how to size the trade.

Friends, Several kinds of Munchies for your enjoyment today… There’s this hedge fund manager who has a Pavlovian habit of looking at any growth-of-a-dollar chart and blurting “Is that log?” The onlookers who endured this routine quietly suspected that he doesn’t really know what that means. You can receive this story in any number of ways. The most adaptive conclusion is “America rewards risk-taking above all” but, hey, I’m not here to judge your reaction.

In this issue: energy as the ultimate currency “middle manager” fiction Friends, A year ago I wrote a piece called Capitalism Is a Temporary Condition.

Friends, Stan Drunkenmiller has been in the news recently for his WSJ op-ed. Besides its message, much is being made of his use of AI to write it. While I’d prefer he didn’t use AI to write, it’s preferable to him saying nothing at all.

Friends, In Chapter III of The Theory of Political Economy, William Jevons describes the economic notion of marginal value in 1871. Nor, when we consider the matter closely, can we say that all portions of the same commodity possess equal utility. Water, for instance, may be roughly described as the most useful of all substances. A quart of water per day has the high utility of saving a person from dying in a most distressing manner.

In this issue: for when the world slows down family investing webinar futures premium cell Friends, I’m in Vegas with friends to see GnR this weekend. 36 hours of noise bookended by 1-hour flights of peaceful purification in the form of flight reading. Most of what I read on the regular is work-related and instrumental. I save appreciative reading for when the world slows down. Flights are a reliable example of such a time.

Friends, If spot is up 1% and vol is up 1%, what delta lean do you need? Say you’re long 1,000 vega and vol is 40%. Vol ticks up 0.4 (1% relative move), so P&L is +$400. To stay flat, you need to lean short $400 / 1% = $40,000 of underlying. Compactly: delta lean = −vega × σ × β -$400 = -1000 x 40% x 1.0 σ is the vol in percent and β is the relative or percent vol move per 1% spot move. (Note that short vega flips the sign.) I introduced this idea in embedding spot-vol correlation in option deltas.

Friends, I usually have a concrete plan in advance of writing, but today’s letter is totally spontaneous, other than knowing that something would be published. I wrote it all, but found myself stuck on a title. I hope it will make sense by the time you’re done. So…one of my oldest friends, someone I consider family really, is enjoying a sabbatical year. He and his wife crashed with us for 10 days. It’s one of those slices of time that you know before it’s even over that you will have nostalgia for.

Friends, I know this is an off-cycle post but I just want to add a couple of important insights as a brief follow-up to last week’s the risk-reward of option collars. As a reminder, that piece starts with a highly intuitive (ie what actual investors think about) measure of an option collar’s risk-reward and the aspects of the vol surface which push it up or down. The point is to marry the vol lens with the price lens people use to actually make an investing decision.

In this issue: a showdown with yourself unique job opening real-returns trading stock-bond correlation confidence intervals on bounded ranges Friends, Earlier this summer, while still in the midst of reading, I recommended this book: I wrote: My wife and I are both reading this. It’s laugh-out-loud funny. Gary is an excellent writer. The novel is written from the point of view of an elite school’s endowment CIO.