I’m new. Forgive me for being giddy and please pardon the slobber. I just like the cut of your sample bag.

A little taste before you buy. The ritual of pulling out the bottles and rotating the labels sends anticipatory butterflies of rose petal and violet across my palette. Have I had that one before? Which will go best with our program? Damn I love a good Châteauneuf-du-Pape.

Sampling for wholesale purchase doesn’t have the pomp and circumstance of a customer oriented tasting. One glass, rinse with wine, spit a little bit if you have to. Dumping encouraged. Noses deep in the glass, gargling noises as the juice rolls over every part of your tongue.

Most importantly, there’s only one opinion that matters; it’s yours.

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Mano y mano, at most a doubles match, there’s no hiding here. Tastemaker and list curator, the buyer is responsible for what gets offered to their customers. A balance of price points and regions adds some objective structure, but at the end of the day it’s all about feels - what do you think?

Small tables lead to big discussions.

There’s no hiding behind nods and hummed affirmations. “I like this” doesn’t quite cut it. And at the other end of the spectrum, pontificating around WSET classifications of medium acidity and a garnet hue aren’t exactly answering the real question. Screw your 92 point rating.

Romantically that question is “does this wine bring people joy”; commercially it’s just a question of whether it sells. If you believe the utilitarians, the latter indicates the former.

Earlier this week I found myself sitting at a more familiar small table, but with equally few places to hide my opinions. A few series 65 registered dorks in a conference room, and someone posed the point blank question that every client asks - what’s the market going to do? No prospects to impress or regulators to surveil the conversation - whaddya got?

My defensive reaction when I have absolutely no clue what to say is some hemming and hawing about more buyers than sellers, and that the market can stay irrational longer than you can. Dash it with contemporaneous examples of the AI bubble and a nodding wink to how “this time is different.” But that’s cocktail party repartee, not any real pearl of wisdom.

If you’re in the right circles, too strong of an opinion about what’s going to happen is appropriately and quickly dismissed as clueless. Uncertainty is a given. But a wishy-washy answer that sounds pre-hedged isn’t helpful when all the inquisitor wants is a matchstick in a cavern.

There are some medium strength opinions that carry water. The skyward bend in equity prices gives reason for pause. Four years ago the S&P 500 was half what it is today. The US GDP in Q3 of 2022 was $26T. Currently we’re running about $32T. 100% growth versus 23% growth. Far from a complete story, but worth raising an eyebrow.

Even the most common and benign position is an opinion. If you’re following conventional wisdom and buying low fee diversified market exposure for the long run - that’s still a vote for a general class of outcomes.

That’s as close as I’ll get to a directional call about the market. “Most likely up in the long term.” When it gets there I don’t know, but I do have an opinion on how. It’s going to be more volatile.

The evolution of market structure in both equities and options will be a significant contributing factor. With the proliferation of exchanges, while customers have more and better ways to execute, the inherent nature of this liquidity fragmentation creates microstructure chop.

Options market makers must display their interest across multiple different venues, and their risk tolerance doesn’t scale with the count of exchanges. This leads to phantom bids and offers that disappear when something else shifts, and the ripples of oversizing trickle back into the underlying markets.

On the equities front we’re seeing a trend away from lit markets. Not only has dark pool activity risen to nearly 50% of US share volume, there’s a simultaneous erosion of regulatory structure with the proposed elimination of the order protection rule. As more shares trade less transparently, the price discovery process gets inherently more choppy.

The speed of trading continues to accelerate. A human eye can recognize flashes of light in about 15 milliseconds, but takes up to 250 milliseconds to push a button. Matching engines move more than 100x faster. Before you can blink trades, updates, and more trades will happen.

Particularly with order entry code accessible to anyone, the second, third, and tenth order consequences of this are highly unpredictable. Interactions and their subsequent reactions quickly push into the wilds of randomness.

High frequency trading has been around for more than a decade, and that alone will not increase the volatility of markets. In general it should hasten and improve the price discovery process. But trading can happen so much faster than the human brain can process it. On time scales more like hours and days, we’re seeing market moving information quickly traded on before it can be fully digested.

Artificial intelligence will quickly be able to handle that cognition back at the high freak time scale. But that will only increase the value of a human weighing the decisions at their relatively glacial pace. In a world of generative content and fake news, volatility is a given.

As the bots distance themselves from humans, so we distance ourselves from each other. The Overton window continues to widen, and the definition of centrist has never been more off kilter. Politicians left and right are playing eyeball grabbing games that will only get more extreme, and the incentives are all about stirring the pot.

Volatility begets volatility. With choppy seas forecasted, the best reaction is to rock the boat. Much like inflation expectations drive interest rates, wider distributions of outcomes encourage behavior that perpetuates that variance.

So what’s the trade?

Volatility isn’t necessarily mispriced. Long term options have always been priced at an elevated level to the present. Contango is the norm, and only in periods of panic do we see the short term spike into backwardation. Between now and next month’s expiry I can clearly see the possibilities, but the further out you go the more unknown unknowns exist, so buyers pay more for options.

Not only can’t I pitch you a security to buy, there’s no good answer here. The closest thing I’ve got is to grok the concept of being long vol of vol, antifragile, or just convexity acceptant.

I’ve got strong opinions about wine, and weaker ones about the market. But neither matter as much as the expectation of uncertainty.

Flaws are personal.

Is the gap in your teeth charming or begging an orthodontic appointment? Being pedantic, all virtues and sin are relative. But a flaw is not an absolute judgement. It’s a splash of local color, with a range of impacts, depending on who, what, and when.

Flaws can be fatal of course, especially to Greek heroes with deeply embedded character traits. The flaw in a plan can be the unwinding of a villain’s coup de grace, or overlooked factor that flubs your million dollar strategy.

The more benign flaws are the paint chipped bureau that’s shabby to some, chic to others. For wine drinkers there’s a whole category of faults that are objectively defined but subjectively appreciated.

While it’s difficult to measure the level of brett (barny-ness) or cork taint, volatile acidity has a threshold definition of 1.4 g/l of acetic acid allowed in red wines from the United States. The line where your wine becomes vinegar.

Volatile acidity is slightly more complex than the single acid they measure - there are other esters that contribute to this experience. A high measurement typically indicates sloppy cellar practices, so it’s a well intentioned benchmark to monitor. Wines with too much volatile acidity also simply taste bad.

But context is key here, and the European Union has recognized that in their own rulemaking. The starting point is similar to the United States, but the limit climbs with alcohol levels, allowing higher strength and aged wines greater degrees of acetic acid.

At the right levels in the right wines, this “flaw” will provide lift and balance. Sweet botrytized white wines with large amounts of residual sugar demand that counterpoint, as do ripe high alcohol reds.

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Other flaws in wine are even more personal. Eucalyptus taint is something the Australians battle with, as many vineyards are planted in close proximity to the plant. A moderate breeze will pepper the ripening grapes with the eucalyptol oils. This lends a medicinal freshness to the wine, with notes of mint, menthol, and eucalyptus leaf.

Wine drinkers start to consistently reject a red wine containing more than 27.5 ppb (parts per billion). Below that level, there’s a sweet spot where a little bit actually complements the big ripe grapes, and is chosen more often by tasters. But even at the “taint” threshold, 38% of consumers prefer the “bad” wine.

Don’t let someone else tell you what’s a flaw. Small doses of toxic traits lend complexity, even an edge.

Floor trading and the mano y mano connection of the call around market are appropriately called “high touch” to distinguish them from the automated, impersonal, “low touch” electronic executions. Order book queue tactics and blind auction strategy are replaced by a very personal connection with your counter party.

But unlike dating or making friends at the playground, the most remunerative relationships are laced with their own acidities, tensions, and flaws. The character traits that make someone unpleasant to share a beer with or unproductive in a collaborative meeting tend to generate more PnL.

Now for every aspiring trader who will take this as license to be a jerk - that’s not the full story. I know plenty of very successful people who are catching their flies with honey. If you head out with the idea of making a flaw your personality, there’s a very good chance you’ll overdose.

Tight lipped-ness is the high touch equivalent of volatile acidity. When a broker walks into the pit, a good market maker is a stone wall of information flow. They give no indication about the size or bias of their position. Even if they’re bleeding from deadweight open interest on the line, they mustn’t let the broker or other traders in the pit see anything that can’t be deduced from public information.

By keeping the counter party guessing, you preserve the ability to navigate the order, size up when appropriate, and fade quickly when not. There’s no leakage about the tools you’re using, or your opinion on what that order means. A poker face must hold whether you’ve got pocket aces or nothing at all.

In the wrong context though, this flaw becomes destructive. High touch trading might be the big jammy red that can handle volatile acidity and eucalyptus taint, but when interacting with colleagues on the same team we’re looking at a delicate white grape. Too much self interest means the support team can’t help you as easily and you miss out on the net positive effects of information trading with your peers.

The same holds true for many volatile characteristics that are required of successful traders or investors. A dose of contrarianism is powerful for identifying opportunities, but being stuck in a permanent haze of suspicion is blinding. ZeroHedge gets exhausting.

The overzealous risk manager that closes everything down, also cuts the tail on a lot of edge and potential. This is the fundamental problem with blindly using condors to collect the volatility risk premium - the leg you buy for defined risk is where the VRP tends to be best monetized.

I could go on. Letting winners run is also a failure to monetize. Conviction becomes stubbornness. Complexity is explanatory until it is obfuscatory.

It’s well known that CEOs tend to exhibit psychopathic tendencies at a far higher rate than the general population. The charm and ruthlessness have their place, but again too much creates a toxic culture and impulsive risk taking. None of this means you go hunting for your next chief in a psych ward.

Finding a personal style - as an investor or just an individual - is all about balance. Every trait has a toxic level, but there’s rarely a hard line of where that should be. Some folks like their Shiraz to taste like toothpaste.

When a secret is broadcast wide, it loses its luster.

The charming bodega down a side street in Barcelona is no longer an authentic local spot when the denizen fans of a celebrity travel journo descend en masse. Under the radar wines catapult in value once their price to quality ratio becomes known.

Insider knowledge is valuable because it is exclusive. Now that everyone knows the best pizza in New York City comes from a small shop in Midwood, you can spot the tourists on the Q train several stops before Avenue J.

Fragility must be protected. There’s only so much fresh basil that Dom DeMarco can hand cut.

The temptation of privileged information is that it begs to be shared. Blog subscribers demand new and exciting tidbits with every weekly missive, but the expert gains credibility and earns a living by spreading the knowledge.

Stature can come at a significant cost. If you tell everyone about your favorite spot, and then find yourself waiting in line there, you’ve polluted your own well. Less selfishly, you’ve changed the dynamic for the locals who just wanted a slice. One less piece of authenticity in this world.

There is a complicated duty that comes with knowing something exclusive.

Insider-trading rules offer an extreme example. Material nonpublic information is privileged and burdened by duty. Corporate insiders can’t simply exploit their early access to earnings because possession of information does not necessarily confer an unrestricted right to use it.

But the travel writer owes a duty to their clients. Their readers compensate them with eyeballs or subscription fees and expect something in return. There is a tension between curating the best possible selection and defending the delicate balance where that “best-ness” thrives.

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While the most exclusive Michelin star restaurants command prices that hardly look inefficient, for the most part hidden gems look very similar to edges in markets. The quality, experience, or return, is disproportionate to the price you paid or risk you take.

Edges go away as inefficiencies are stamped out; that’s the power of the invisible hand. With traders selfishly seeking returns for themselves or their clients, they are serving a greater good. Casual participants get significantly better pricing because hedgies are constantly looking for the asset equivalent of the world’s best tapas bar.

Active traders are notoriously protective of their strategies. Everybody loves a little bit of cloak and dagger, but once that secret is known, far worse than a queue is a missing revenue stream.

The key to exploiting a market opportunity is also about balance. Maximizing total returns is a function of present day capture and long term preservation. Get some while the going is good, but keep the gravy train moving.

Solo traders have the benefit of being fast and nimble to new opportunities, while professional trading shops - whether they’re asset managers or prop style - have the infrastructure to persistently capture edge. A big part of that overhead is dedicated to solving coordination problems and preserving that equilibrium.

Managing the liquidity footprint of a market maker was an exercise in gatekeeping. The “best” products aren’t necessarily a secret, but to squeeze the most revenue potential out of an opportunity, it can be necessary to limit the size or number of traders.

You can’t control what other market participants are going to do, but you can selfishly act responsibly by managing access to not overwhelm a fragile edge. Intentional exploitation conveniently pads your pockets, but it also serves the greater good of liquidity. Excess is as bad as a deficit, and short term greed from showing too much size or too tight of a market hampers price discovery.

When the gatekeeper’s duty is to maximize revenue for their clients, it conveniently aligns with improving the overall ecosystem. But that obligation becomes muddy when there’s a question of education and stewardship involved.

As a software provider, I have an obligation to my customers to deliver timely and accurate analytics. Beyond just being quantitatively correct, there is an ethical responsibility to provide information that is reasonable, useful, and more than glitzy marketing. More along the lines of the fuzzier journalistic search for “Truth”.

Options liquidity varies significantly across the thousands of names listed. The SPX is several orders of magnitude more liquid than even the names at the top 20th percentile of liquidity. Forget about the markets in name 6000. This has massive implications for both pricing and analysis. Liquidity means more strikes and tighter markets and far richer information content.

So I built my own arbitrary gate around the top 250 issues. This was roughly where the markets started looking different enough that you couldn’t reliably calculate consistent metrics on volatility, because the issue lacked expirations or strike listings to interpolate from.

But times change. Not only has overall liquidity in the market improved, but philosophically I’ve broadened my horizons. While the information content on name 1,000 may be far lower than Apple or Microsoft, that doesn’t make the information worthless.

The line in the sand here exists out of a duty to my customers, but it’s not set in stone, nor is it the only tool at my disposal. With the right context, even lower quality data can provide a signal. Showing users where information becomes fragile is more helpful than deciding on their behalf.

That distinction matters because while the liquidity is fragile in lower tier issues, it’s not quite the same as the insiders only taco bar. Some secrets lose their value when shared, and other opportunities collapse when overcrowded. But the gate looks different when externalities are limited.

The gatekeeper’s duties are multiple, and are dependent on the situation. You may owe something to clients, customers, or readers - or the object itself. Lines in the sand must be drawn. But does that duty require you to guard the gate - or inform what’s on the other side?

By the time we arrived at Blockbuster the new release shelves were a row of empty VHS cartons, no tapes behind them. Not because we were late per se, just not especially early.

There were plenty of other good movies to choose from. The hard part was negotiating consensus with my sister. Next stop was Lotus for Chinese food, or Venice for pizza. No disagreements with either.

One week I managed to sneak home Wayne’s World, but made the mistake of starting before my parents left for their dinner party. A particularly acute line about “spew into this” red flagged the movie for that evening and set my film studies back several months.

By high school I thought my tastes were maturing, and I’d upgraded from VHS to DVD. No matter that I could only play them on the laptop - watching the third director’s commentary on Fight Club alone in my room was a perfectly good use of two and a half hours.

The more you wanted to learn about film the longer and weirder things got. The Kubrick Collection was an eye opening. You had everything from the ultra long shots of 2001 Space Odysesy to the insanity of war in Full Metal Jacket and the raw sexual violence of Clockwork Orange.

This wasn’t the feel good ninety four minutes of Mike Meyers making puke jokes, but a piece of art that made you shift in your seat. And you came back for more. I never quite got to the beret wearing level of film studies, but I did briefly pretend that Citizen Kane was the greatest film of all time.

It actually took me three tries to find out what “rosebud” was. I was downloading movies on Limewire, and a material percentage of the files out there were garbage. Ten minutes in, fuzz appears. The free for all with media once again meant I didn’t have to leave my room, but also didn’t have to pay. They weren’t yet talking about it in my econ classes, but we were seeing first hand how the economic landscape dictates what kind of content gets created.

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Regardless of the display medium, many of the films I’ve been consistently drawn to come from a very specific era. Which was itself a function of the business environment that opened opportunities for visionary directors creating art that made you uncomfortable. And coming back for more.

The 1970s saw some of the greatest films of the century. The Best Picture Oscar nominees would each have swept the field in a lesser decade. And the weakened hold of the old studio system opened the gateway for people like Stanely Kubrick, Martin Scorsese, Francis Ford Coppola, and Steven Spielberg to step in. Imagine a 27 year old filming Jaws today?

Having lost their hit making and culture defining influence, old Hollywood was searching for an answer to what people wanted. They were willing to let auteurs make the final cut instead of a boardroom of suits. And the socio-political backdrop was en feugo.

This was a crucible for pure, authentic, and emotional art. The kind of filme you have to get invested in and give yourself over to the whole process. The droogs hurtling a massive phallic statue doesn’t have quite the same impact when you’re also doom scrolling.

But not everything has to be high art. The Motel 6 also needs something to put on the walls of their 150,000 bedrooms. Just like mediocre noise from Netflix in the background is a genre and AI slop writing is helpful. The good enough bar already includes summaries and interactive wiki use cases. A lot more is inevitably coming soon.

So without diminishing the beauty and glory of what the silver screen can do at its best, it’s important to first accept that slop is a useful and distinct type of content. And given that, we have to consider whether the purpose of any product is slop friendly or not.

Large language models are the ultimate decision by committee. There is a genericism and inoffensiveness to what gets produced. The perfect wall hanging for a traveling salesman, but certainly not something we’re writing about fifty years later. You’ve got to piss some people off to earn that.

Committees work well for endeavors where consistency and risk management are important. The investment committee at a fund acts as a steward and allocator of capital. Multiple interests are intended to dampen rash decisions and the group provides consistency through a procedural framework.

I think an AI will actually become fairly good at making capital allocation decisions. Perhaps at sourcing alpha, but more so for the beta exposure that so many general purpose investors need. Robo advisors have long been doing most of the mechanics, and the softer touch personalization is ripe for a good bot. (The compliance discussions around this must be fascinating.)

For my dear and beloved options, the skip isn’t that much further. The risk transfer implementations crave tools that leverage well guided committee style slop. (I’m thinking “good” slop needs its own non pejorative word. Chip-chat?) The tools currently available to retail investors are helping drive significant volume.

Andy Warhol said “Making money is art and working is art and good business is the best art.” If you want your metier to be an art and not just slop management, you have to tap into something raw. Really get your hands dirty and own the final cut. If you’re going to half ass it, chip-chat already has you beat. Own that. Focus on something more interesting.

Both buy side alpha and structural alpha are inherently orthogonal to the consensus of beta. That’s going to be uncomfortable at times. But there are plenty of opportunities. Everything is an AI bet right now, so individual art - however that’s expressed - is the contrarian trade.

You are not special. You are not a beautiful or unique snowflake.

You’re the same order as everyone else.

Human beings have an innate sense of fairness. We chafe at the vehicles cutting an obvious line at Exit 31. Game theory experiments with the ultimatum game shows that players will refuse to accept an opponent’s proposed split of the pot if it is unfair - leaving both empty handed.

Whether observers or participants, we like a good sporting fight.

Our justice instinct isn’t based on some rational calculation. Even in versions of the ultimatum game where the recipients cannot reject the offer, the proposer will still offer some (meager) allocation to his counter party.

Yes we understand that life and society are mostly a series of repeated games, and that reputations are prized and retaliations will come due. But there is something deeper than calculus here, where a sense of societal norms must be maintained and exploitative behavior must be punished.

A red card might carry over to the next game, but that’s a rare exception in competitive interactions. Whether it’s sports, markets, or markets on sports - most rules are structured to make sure things are fair in every single interaction.

There’s less to grumble about when the rules are clearly posted and everyone is bound by the same obligations, responsibilities, and queue position. You might not like waiting in the slow line at the grocery store, but it’s hardly “unfair.”

But here’s where another part of human nature seeps in. 73% of Americans think they’re above average drivers. I’m in an important hurry - just this once. Can you please make an exception here?

Hold the line.

Simple presents invaluable clarity in the face of complex and dynamic forces. Eroding that with asterixis, carve-outs, and regulatory pork maligns the integrity of competition.

The bedrock of markets is fairness. Price discovery and the resulting efficiency of capital allocation can only be achieved through mechanisms that cleanly promote equilibrium.

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Seeing the proposal from the SEC to eliminate the provisions of Rule 611 regarding trade through protections rankles everything I believe about order handling and market structure. Top of book should be respected by everyone, not ignored because you have a fancy compliance department who can justify it ex-post.

When the “National Market System” was formalized via the implementation of Reg-NMS in 2007, the idea was simple - if there’s a market center with a better price, that had to be traded first. Exchanges became protected venues, where brokers had an obligation to trade the cheaper offer or higher bid before executing at a better price.

There are various self interested reasons why a broker might not want to trade there. Perhaps there’s the benefit of hitting a fee tier by doing a certain amount of volume. Or more sinisterly they know the counterparty at a different venue. Maybe it’s just a pain to manage such complexity.

This provided an order by order imperative that the customer was going to get the best price. No wishy washy promises of best efforts and lutte raisonnée, this was a nearly pure black and white line.

But now less than twenty years later, apparently the leaps and bounds of technological advance have obviated the need for customer protections. And the lobbyists have convinced the Commission that the burden of connecting to different venues is too much for a well compensated industry. And woe be them, the compliance is such a headache.

I’m rather unsympathetic to those arguments, because if you want to be a broker, that’s your job. That’s what the money’s for.

Are there venues that are part of the NMS system with extremely low volume and present a moderate headache - absolutely. But that can easily be solved with a better definition of who’s part of the system (e.g. a market share minimum resolved every quarter). Far better than throwing out the entire rule.

Larger orders are always brandished as something that deserves special treatment. They’re not looking for volume discounts on transaction costs (those are already baked in), but rather a privileged lane to execute in, immune from their own market impact and pesky reverberations of a market digesting new information.

Block orders come from many sources. Sometimes it’s a hedge fund or large active participant trying to lock in an edge. But just as often the end customers of that block order are the thousands of retail holders of a mutual fund or ETF. When an asset manager wants to rebalance, they represent thousands of tiny mom and pop orders, who are the ultimate beneficiaries of better pricing.

The best argument for open outcry trading and the source of resilience of manually negotiated orderflow is that outsized liquidity is better handled mano y mano. Markets might overreact to 100 x 10 lots coming in, and while a single 1000 lot will move the market, there will be less turbulence if the whole size is digested at once.

What the prosecutors of Rule 611 ignore, is that there are already specific exceptions that allow large/block orders to execute more cleanly while also maintaining the purity of the rule. Intermarket Sweep Orders (ISOs) are the primary mechanism that allow large orders to trade immediately, and they are a straight forward way to deterministically get size and price. There might be room to strengthen this by looking at depth and timing considerations, but throwing out the full kit is not the answer.

What I find particularly ironic about the proposal to remove trade through protections is that while the current burden is poorly quantified, the cost of implementation is significant, and the impact of an altered market structure will be borne by the least sophisticated participants.

Trade through protections have been a fundamental pillar of order routing for almost two decades. Broker and exchange software has been built around this assumption. The algorithms that drive better executions for every class of participants will need to have their assumptions completely rewritten.

Does everyone remember the demonized High Freak Traders? When Reg-NMS was implemented, there was a several year period where sophisticated firms were making a killing taking advantage of the new microstructure. Faster connections between venues and order type gaming skimmed billions of dollars into a few pockets before the rest of the market caught up.

Market fragmentation is a difficult problem. Dark pools are eating the lit venues’ lunch, and that has its own structural risks. Without good lit markets to lean on, dark risks becoming less efficient. And tiny venues with niche customer bases create an outsized impact on the smooth functioning of a larger exchange.

But a better price is a better price. And large orders need to pay for the cost of their impact.

We already have a principles based review of best execution responsibilities. There exist allowances for trade throughs in appropriately limited scenarios. Removing the structural line and codifying exceptionalism opens a wide lane for abuse.

There’s a Pandora’s box of excuses and exceptions for why this order is different. I’m skeptical about how removing the basic concept of “no cutting in line” does anything to support better price discovery or customer protection.

If you’re even 10% as passionate as me about market structure, there’s still an opportunity to comment on this. You can submit one here, and view the other responses, which have been overwhelmingly against the removal of Rule 611.

Liquidity is my favorite subject.

Options liquidity, stock liquidity… liquid liquidity.

I find it cropping up in the places I least expect. Like the clickbait ads that are so ridiculously precisely targeted, I can’t help but fork over my personal information for more details about bourbon futures.

Buy brand new whiskey, let it sit for a couple of years, and voila you’re earning 14-18% CAGR. I’m no stranger to liquid alternatives, and this one is missing the burn.

Storage fees were taken care of, and there was even a portfolio manager who could recommend a ladder of different ryes and wheated bourbons. As the angel’s share left the barrels, offers would start pouring in.

Trying not to let the subject matter distract me, I wanted to poke holes in this. Pricing was twenty cents on the dollar compared to what I saw on retail shelves. I know there are a lot of mouths to feed in the distribution chain, but doubling your money in four years still leaves plenty of fat for wholesalers and liquor stores.

The liquid in the barrel comes from some esteemed producers, so pedigree isn’t the concern. The liquidity to be concerned about here is where the buyers come from and at what price.

There is absolutely a secondary market for bourbon. Outfits like MGP offer an outsourced distilling solution, and a selection of pre-aged spirits for impatient whiskey entrepreneurs. No need to wait four years, you can build a custom blend today. Buy it from this guy who clicked on an Instagram ad.

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So why aren’t they or anyone else involved buying these spirits up at pennies on the dollar? Structural edges like that are usually the reward of active participants. If the return is such a lock, why aren’t there distillers, banks, or funds that are scooping this up? In commodity markets the difference between delivery now and later is the cost of carry. That’s not free money.

If the carry is already baked in, some other factor is massively discounting the grand inevitably of life and markets - the passage of time. A product that gets better with age, and you’re being offered it at four to five times the risk free rate. What kind of hidden risk makes packaging this up in a 506(b) offering the best source of capital?

The heartstrings pull strong here. If I took just one of the barrels and bottled it myself I’d have Christmas gifts for 20 years. There’s a very significant cool factor. Supporting an industry, and being able to fancifully claim your small but important role in the f-eye-nahn-sing of American whisky makes for great cocktail party chatter.

But that’s all the more reason to be suspicious from the get-go. The fantasy of being a bourbon baron fuzzes the arithmetic faster than what’s in your glass. Even if they use financial words like returns, ladders, and diversification, this is just a bet that someone wants to buy your booze.

It’s hard enough to look at the most liquid markets in the world and guess what the experience of the future return path looks like, but at least I know I can sell or buy when I need to. How the hell do I have any confidence about moving 25 barrels of old corn juice?

The numbers only matter when it’s your turn to get out. Liquidity is a metric that we can analyze through bid ask spreads and market depth. We can talk about activity, turnover, and open interest as other symptoms of fair and durable pricing.

But liquidity is also an experience. Every trade is different. When you interact with the market you change the landscape and risk will never look the same again. Dramatic emphasis mine, but trade execution is far from a predictable controlled physics experiment.

Over time if you make enough trades the winners and the losers start to balance out. A good fill here nets against a bad one later on, and some meaningful conclusions can be drawn about the average cost to transact and price impact.

The ultimate price you pay or receive on a transaction is unknowable until the fill hits. Most retail orders aren’t going to choke a market maker’s position sizing, so while that’s more intuitive than impactful, it could absolutely happen around the margin.

What’s far more likely is something benign like a senior trader being on summer vacation and the trainee covering is brand new so he turned off their dark pool responses. Or she was out for a delta walk buying a $10,000 burrito.

Little bumps in the road like that might leave a ding, but they’re an afterthought in most of the liquid stocks and options. The real risk is that no one is there at all.

The worst thing about bad liquidity is that it usually looks like good liquidity when you dip your toes in. C’mon in, the waters warm, we’re all beating the S&P with no downside risk.

If the liquidity is bad when you’re putting on the trade, you at least know what you’re up for. If I’m hunting down bourbon barrels, knocking on distillery doors, it starts to make sense why there might be some premium. That’s a return on effort.

The problem with fancy sounding investments is not a lack of optimism. Which is all the more reason to double click until you find the catch. The opportunities all look rock solid and boundless until something completely unknowable happens.

Even as I talk myself out of this, there’s still a little bit of me that’s intrigued. The sizzle is really selling this hard. Maybe there is an untapped bourbon financing market. A curiosity I’ll ponder from afar with a rocks glass in hand.

I’ll have to pass and settle for what could have been. Not only do I not see the clear path out of the trade, someone bought my eyeballs to get into it. If bourbon comes with a headache, I at least want a taste.

The first vodka distillery in America was in a quaint Connecticut town.

Today the only reminder is an empty brick warehouse sitting across the tracks from the train station. No plaque or rusted sign, simply a bit of folklore from the brief time when a soon to be powerhouse was a curious foreign upstart.

The Smirnov family had been wildly successful in Russia, and along with a thirsty client base of nobles, their spirit was regularly served in the Tsar’s court. Things turned upside down with the Bolshevik revolution, and only one son managed to flee for Paris. Vladimir carried on the family business, but struggled in the land of wine and cognac. After several years he finally sold the exclusive rights to American distribution to a vacationing cosmetics executive named Rudolph Kunett.

Kunett wasn’t long for the spirits business, and neither was his founding warehouse in Bethel CT. After only five short years, he sold the company to a larger Hartford operation and the facility moved to the capitol. Today the brewpub across the street is booming, but the clear spirit has left almost no trace on the town.

And that’s just how Smirnoff would have liked it. Just as they worked for decades to find a place behind the bar, their most lasting mark would be a notable absence.

Prohibition threw a wrench in American drinking habits. After almost 150 years of innovation in both the quality and service of spirits, the bartender’s Library of Alexandria was torched. Tipplers began to drown their wretched substitutes with sugars, juices, and anything else they could find to mask the flavor of bathtub gin. Depression leading into another war didn’t help.

The men and women of the new post World War II economy took drinking culture in a different direction. The new era was about clean, modern, and most importantly not stinking of booze. Plenty of spirits got drunk, but the lovely feeling that whiskey, rum, and beer delivered, also left unwanted side effects.

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Smirnoff was able to slide in with a deft marketing campaign that tackled its (fully American owned and produced) Russian heritage with irreverence and savvy. The Moscow Mule was popularized despite its Red associations through a Hollywood connection, and the great white whiskey leaned into its odorless aftertaste.

“It leaves you breathless,” their marketing copy sang. Said otherwise, the best part about this product is that no one else has to know you’ve been using it.

If you’re hiding your drinking, you’ve got some other problems to reckon with. And whether you drown it in ginger beer, orange juice, or take a chilled shot neat - it isn’t going to fool many people for long.

But in the spirit of David Ogilvy - the key to success (in advertising) is to provide the customer with a benefit. A product that both inebriates and obfuscates seems to have two.

Alcoholic beverages are nearly as regulated as financial products, and both share a hangover of consequences if you over indulge. It used to be that stocks were stocks and bonds were bonds- caveat emptor, but there was no hiding from yourself or others what you were doing.

Now we’ve reached a Smirnoff moment, where the most attractive thing about new financial products is that they obscure what’s actually happening. Breathless.

The most obvious example here is prediction markets. It’s not exactly new or novel to point out that these are gambling instruments masquerading as financial products. Sure the line is grey, and in whatever iteration of the meme you prefer - it always has been. Abstractally the difference is philosophical intent, but practically the CFTC has to draw a line somewhere.

With a definition for gambling as something like the obscenity test - “I know it when I see it”, plenty of slick marketing will have you believe that hedging event risk is a perfectly appropriate role for your brokerage account. So long as there’s a soccer team that needs to mitigate the financial impact of a potential relegation, the contract can pass the “economic purpose test.”

But one valid use case doesn’t justify taking the same instrument to roll the dice for a dopamine hit.

The same logic holds for 0DTEs. The valid use cases for hedging and strategy design are a distraction from when that same theta hit is used for disingenuous copy to promote short term income or feeding yolo bets.

Various options based ETFs pitch themselves as alleviating the pain of trading derivatives. The holy trinity of easy, consistent, returns are neatly wrapped up in a breathless package. Pick your specific flavor and let the fund do the rest.

Managing overlays, buy writes, or put spread collars gets to be a pain. Take away all the side effects of that exposure and you have all the gain without the pain. That is a reasonable solution to a real problem. So are the sizing benefits - with only 1 share of an ETF you can get the exposure of something that would take hundreds of shares to do on your own.

But you can’t hide from the downstream impacts of ethanol forever. Selling calls will always be about the short upside convexity and downside exposure in exchange for a fixed payment based on the best estimate of volatility. That’s what you get. For all it’s pain or gain - that’s the point.

Smooth over every detail about strike or expiration or ticker selection or size, it’s still a covered call. Or a 2x leverage play. Or an inverse CPI trade with a yen kicker. Structured note parlays in an ETF are going to be epic.

Easy is nice. Easy takes the pain away. But easy access demands strong opinions.

Vodka is a middling spirit, and sports gambling doesn’t belong next to my low fee diversified retirement vehicles. Options ETFs lean too far into their marketing, and know the package isn’t ever as neat as presented. I could go on. But as my friend Andrew reminds me when I start expounding about wine - “nobody gives a f&ck.”

Advertising is there to sell you on a solution. Customers don’t want features or products, they want an end to the little nuisances. And more money. It doesn’t matter whether they’re worried about boredom or economic risk.

Returning breathless from your three martini lunch doesn’t change anything about the effects you’re feeling. Now there are as many good reasons to raise a glass as there are good calls to sell. There’s nothing wrong with the product, the trade, or regulation of vices.

Only to know that the packaging and marketing exist for a completely different purpose than yours. Without an opinion about what makes sense in the first place, you’ll be caught breathless. Bourbon tastes better anyway, just own it.

Despite an incredibly disappointing loss earlier this week, America has finally become a soccer nation.

World Cup fever has swept the nation from Seattle to MetLife stadium. Millions of tourists ventured across the Atlantic or Pacific to watch their home country’s team battle for the biggest prize in sports. And Americans are right there with them.

Every restaurant with a television has become a de facto watch party, with new teams like Cape Verde seizing hearts and minds, while the old guard like Argentina continue to show their charm. You might not see soccer for another four years, but everyone is caught up in the here and now.

Whether you’re still learning the intricacies of the offsides rule, or grappling with what video review has done for the beautiful game, football fever is inescapable. Even your average New York Times reader who’s never set foot in a stadium knows what “Ro!” means.

But what has earned the US Men’s National Team its international stripes, is a far darker element. Even worse than flopping, we’ve learned how to put our finger on FIFA’s corruption scale.

Few public organizations have as bad of a reputation as the governing body of international football. Systemic corruption, bribes, and financial self-enrichment are the hallmarks of the most popular sport in the world. Kick backs and vote trading decide who gets into the cup, and apparently now, ex-post, the backrooms determine the validity of penalty calls.

While I was happy to learn that US striker Folarin Balogun’s red card was thrown out, it cast a dark shadow over the game against Belgium. Say what you will about the call, the maneuvering by the US President to cash in his loyalty check with FIFA tarnishes any benefits. Now instead of the USMNT being fired up by an injustice, they were hiding under a shadow, while all the retributive power had been transferred to their opponents.

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“Working the ref” is nothing new in either sport or business. Baseball coaches get in the face of an umpire’s bad calls not in hopes of overturning the result, but to galvanize their team. Soccer players defend their actions to let the referee know that they are under scrutiny, and plant a festering, self conscious seed of doubt.

Just the suggestion of unfairness is powerful, and subtly warps the arbitrator’s mind. Referees more than anyone want the game to be considered as fair and well chaperoned. In a firm but reasonable manner, just as important as playing fairly is reminding everyone else you’re doing the same.

One of my most difficult professional responsibilities was a referee like position. At least with trading you can live and die by PnL without hurting anyone else’s feelings. Deciding who got access to trade what products and when, was an absolutely thankless job.

There was one trader who drove me crazy. Anyone around at the time knows who I’m talking about. While he was a solid performer, he wasn’t the best of the best, and knew that. So he worked the ref like it was nobody’s business.

Sometimes it came as a charm offensive - “oh man, it’s going to be really tough allocating the first traders to UBER, how are you going to do that?” Underhanded commiseration that let me know he was watching.

Other times it was more direct - “Why did so and so get allocated Facebook?” Even a profanity laced tirade once or twice.

This trader was even willing to play the long game, and advocate to anyone who would listen that there should be a more automated and predictable internal allocation process, figuring he could game the system in some other way.

And you know what he got out of this? Better allocations than he deserved. Not every time, but consistently enough that it probably made him a little bit of extra money. Even in the most black and white of games, where the only thing that makes cents are dollars, working the ref still provided an advantage.

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Every company has their own internal politics, but the market referees were someone to be worked also. To varying degrees every pit has a floor official who is responsible for arbitrating the contentious decisions. Who yelled the price first? Was his foot inside the white circle of the pit allowing him to respond?

The rules are firm in what goes where, but if you’re relying on human judgement, there’s going to be grey. No VAR in the trading pits (thankfully). If you’re friendly enough with the floor official and consistently remind him how quick you are, claims become ideas and then they become facts.

It even happens in the rule making process, where nudging the higher level authorities to see the game your way starts to bend the rules of the playing field. The white circle I mentioned delineating pits? That only came about in Philadelphia because someone with regulatory muscle didn’t like getting beat at their own game.

If you don’t advocate for yourself, nobody else will. Just as in sports this politicking can be wildly public and transparent, peacocking ostentatiousness. Sunlight and theatrics give it more power.

No retail trader is going to have to fight over allocations of either products or trade sizes. But even if you’re the type of investor who dreads his quarterly call from the advisor, you’re going to have to work the ref a little bit.

The active trader should focus on their broker, and squeeze as many freebies as they can get. While commissions are already approaching zero, margin rates and minutiae like transfer fees, or exercise charges. are still very much on the table. You’re not going to get ACATs waived if you don’t ask. And that $100k, $250k, etc. minimum is completely arbitrary - ask anyways.

Here’s a secret - I’ve never turned anyone down who asked for a discount on my software. It’s good business for me and a better deal for you. Go ahead and ask.

If you’re a passive investor and focused mostly on long term allocation decisions, the incidentals don’t matter as much. But if you’re working with someone to help steer the ship, you need to advocate for your risk tolerance and objectives. Far too many clients get put in a generic bucket because they don’t speak up.

Working the ref takes many forms. A gentle ask is harmless and free. Backroom arm twisting and quid pro quo is a step too far.

If the USMNT loss to Belgium teaches us anything, it’s a reminder that someone out there is inevitably trying to put their fingers on the scale. We should condemn and police corruption where it crosses the line. But no one’s going to jail for speaking up for themselves. They might even make a little bit more money.

I’ve come to learn that the golf outing is an event unlike any other.

No other sport has quite the same dynamic or duration. So it was only fitting that when we had to pick a team name, we chose to represent a spirit that is equally unmatched - Jeppson’s Malört.

For this charity event there were gimmicks scattered around the course. They were the standard longest drive and closest to the pin contents, but in the interest of raising money for the doggies, each challenge had a bit of extra spice.

Walking up to the 4th hole, a straight shot par 3 with lots of trouble around the green, we were offered the ability to buy down our score. Shave a stroke or two for a donation to the cause. Beat the pro’s shot and you get entered into a lottery for a trip to Hawaii. Nail the ace, and the trip is yours.

Earlier that morning we’d been joking about the infamous spirit - I like to call it Chicago Chartreuse - that has a dedicated following of fans who hate it. The extremely bitter liqueur is based on an old Swedish recipe, and is so potent that during prohibition Jeppson was able to continue to sell it door to door. Every inspector that asked was offered a taste, and clearly this was medicinal, no one would drink it for pleasure.

Malört survived some lean times, and nearly went out of business when production fell so low they could only find one distiller in Florida willing to make their small batches. But thanks to true believers, it has gained new popularity as a right of passage in the Chicago bar scene, and embracing the joke about its flavor. Current advertising features a theme of “Malort Tastes Like”: Liquified existential dread; If shag carpet could be juiced; and octane fueled Chicago gutter water.

So Team Malört paid down their score to card up a one. I’d already written down the ace before anyone stepped onto the tee box. Then someone hit the bottom of the cup. (Obviously not me.)

Celebrations ensued, our boy was going to Hawaii. A quick text to the bar ensured we’d have shots of Jeppson’s bäsk at the turn, and a story that got better with each telling.

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While the only score that really matters is how much money was raised, I got to thinking about how we should have actually marked that hole. If we bought two strokes off, does that mean one becomes a negative one? I couldn’t in good conscience write that down.

And if I start getting too financial, we’ve unnecessarily and expensively capped our gains. There were certainly other places we could have used two strokes, hedging our expected fortunes here cost us money for no benefit.

Most of the hedges we worry about are to the downside. You only want an offset if things get worse. The organization sponsoring the hole in one buys insurance in case someone wins the trip to Hawaii or keys to the Mercedes. There’s a one in X chance a bunch of recreational golfers hit that, so for 1/x times trip value + markup you can offer up that prize.

The other common form of hedging is less transparent. We swap potential upside for protecting the downside. Collars, hedged equity, even a covered call are all forms of this trade off. With options you can construct any degree of hedge by selling away possibilities in exchange for certainty.

Both upfront premium and potential energy cost money. Getting rid of something bad - whether it’s wet concrete or equity volatility - doesn’t come for free.

When a hedge is but a single trade, it’s easy enough to analyze the tradeoffs. Even with systematic overlays we can come up with a fairly good estimate of what a given amount of protection will cost you over time. But as things get more dynamic, and hedges are little nips and tucks to maintain consistent exposure, the waters get muddy.

Market makers will regularly hedge their positions to remain delta neutral. The entire book gets consolidated to one delta figure, and periodically (but not predictably!) they will trade stock or options to get that directional exposure back to flat. The business here is inventory management, not equity positioning.

Hedging is an expected cost of doing business. One year we went through the exercise of tabulating all our stock PnL independent of options trades and the figure was atrocious. But minimizing the volatility of returns meant we could pay rent and bonuses. Reducing the risk of blow ups meant we could keep stacking nickels and pennies every day.

But investors also might find themselves in a position where they’re hedging exposure on a more dynamic basis. Their objectives are not just positioning for structural alpha like brokers and dealers, but to participate in the maximum amount of gains their risk tolerance allows for.

For strategies that include some variant of volatility targeting, stock replication, or risk parity, adjusting the exposure as convex instruments move and decay is a necessary evil. If you have a short put component that’s giving you long delta exposure, you don’t want that delta to get longer and longer as stock goes down.

But on the flip side, if you’re using calls to replicate long deltas, when the underlying goes up, there’s a good argument that you do want to be getting longer. An investor with long gamma in an upside rally is happy - what’s the gain in hedge this away? The deltas will naturally lighten up if the market reverses before a position reset.

Most hedging proscriptions for these strategies use exposure bands to flag when it’s time to trim the position. The default for these tends to be symmetrical, but that isn’t necessarily in line with the objectives. Especially if you’re bullish.

Recently we’ve seen some pretty sharp jumps in the stock market. Volatility is on the upside. This means for certain strategies you’ll find yourself selling stock into a rally, going against every compounder’s intuition.

There’s no generic answer for how to handle this. Every delta targeting strategy has its own objectives and place in a portfolio that must be considered. But if you’re using options to replicate stock exposure as a long term investor, it’s worth considering how your hedges differ on the upside versus the downside.

This could be achieved by setting different bands, allowing deltas to grow larger if you’re above a reference price, and keeping them tighter below. Options strategies necessarily have regular resets, so above/below is a constantly moving target.

Hedging successfully is about minimizing costs. Transactions, fees, and insurance premiums are all costs, but so is missed opportunity. When you’re long and strong, hedging the same way you would to the downside is paying for a risk that isn’t really there.

No matter where it comes from, we’re always happy with an upside surprise - particularly when it’s a hole in one. But investing is about squeezing maximum value for your risk, so don’t pay for (or give away) any strokes you don’t need.

“Hold the line!”

In the epic opening battle scene of the film Gladiator, General Maximus rallies his troops for yet another campaign on the Germanic front. Before the attack, he inspects the troop placements, and ensures the various components of their attack are perfectly timed. With nothing but bludgeoning hand to hand combat ahead of them, maintaining proper position is a matter of life and death.

While the Romans were likely better fed and equipped, the key to their success was more about discipline and training. A cohesive unit was able to grind down enemy forces, but as soon as it broke they became vulnerable.

It’s unlikely that they would have been using fire pots in a deep woodland battle, and the Germanic tribes were a bit more sophisticated than the portrayed furry woodland gnomes- that’s all Hollywood. But the discipline and strategy of the army is fairly accurate. Bolstered by deep supply lines that allowed Emperor Marcus Aurelieus to quickly arrive and celebrate, the Roman army succeeded through organization.

Set around 180AD, this was peak Rome. While the cracks were showing in domestic politics, the empire expansion engine was functioning at its best. A well oiled machine, built on trust, discipline, and infrastructure.

It’s no surprise that success comes from hard work. Whether you’re training for a marathon or studying to pass the Bar exam, the grind is what’s real. It takes hours and endless repetitions to earn those muscles and get something right. A series of little decisions and discipline results in productive outcomes.

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Missing one training session isn’t going to put you out of contention. Life happens. But the tiniest lack of discipline is insidious. The successive excuses get easier. ‘I only ran twice this week’ becomes ‘I got a run in’, becomes ‘its been two weeks since I ran.’

Russell Crowe’s character isn’t bellowing at the top of his lungs for the army to hold the line because it’s easy.

The pressures and temptations creep in from every angle. Our inner foil is arguably the most difficult enemy, but external forces with competing agendas also pressure decisions and lobby for their own self interest.

A single trader has to worry about buying low and selling high. No matter what your style of edge capture, you are focused on extracting the most possible value from a given opportunity - while at the same time reducing to a minimum the risk of negative value.

When you put together a group of traders, the calculus shifts. The combinatorics fly. The firm has to think about how to allocate capital and make adjustments for offsetting positions. Every individual wants to see the collective succeed, while also being the biggest possible share of that pie.

For market makers one of the biggest sources of competition is access to listings. When open outcry trading dominated, this was all about pit selection. Within the pit you might be competing for position against other firms, but internally trading shops had to decide who went into GOOG and who went to MSFT.

Today those opportunities might look roughly similar, and you can placate two traders with a divide and conquer strategy. Everyone’s better off with diversified revenue, and neither product gets saturated.

The questions start to come when Google volume spikes. Maybe it’s a takeover, maybe it’s a corporate scandal. Now we have an imbalance of opportunity, and the Google trader is doing twice the volume. When the Microsoft trader comes asking to switch pits, when do you hold the line?

Over supply of liquidity is a tragedy of the commons. Both within your firm and amongst other shops, traders want to trade the good stuff. That’s all well and good when the demand for liquidity is roughly matched by its supply. Too few market makers means a given order will have an outsized impact on price movements, and too many yields the reverse.

When inputs aren’t moving appropriately, pricing gets distorted, and outcomes become chunkier. If liquidity providers collectively get too greedy and step in front of orders or show too much size, the natural ebb and flow of price discovery is muted.

The flip side is if you become too dogmatic about what the “right” level of liquidity is, you’re missing getting yours while the going is hot. A good trader should know when to push the gas to the max, and when to back off because they’re starting to get burned. With the revenue from the former dramatically outweighing the losses in the latter. Besides, you can only control so much and plenty of other firms are going to get aggressive too.

This week no one is worried about what’s happening in either of those pits though. SpaceX is the one and only allocation that matters. With the IPO on June 12th, the options will list five days later. We all expect volume.

There are a number of options questions that will need to be resolved. What is the right level of implied volatility or borrow rate, and how steep is that call skew going to be? Trading firms will be debating how to most effectively deploy their collective liquidity resources. There are going to be a lot of quotes flying.

Otherwise though this looks like a normal IPO. The same process will take place for listings, just on a different order of magnitude. We can’t say the same for the equity and index side of things.

Much has already been written about how the index providers have been pressured to adjust their rules to include SpaceX in market benchmarks like the Nasdaq 100 and Russell 2000. The argument goes that this company will immediately be so significant to the market, it would be a tracking error to not include it even for a quarter or two.

It’s not just semantics, there are tremendous flows that follow index composition, effectively forcing passive investors to buy into the stock.

The only one that held the line was S&P Global. SpaceX will not be in the S&P 500 until it meets the existing listing and profitability standards. This was considered a momentous decision, even though the firm was following its well hammered rule structure.

It’s undeniable that SpaceX is different. But the time to litigate the listings rules is not when something new comes down the pike. The purpose of indices is to provide a rule based measurement of the market. You can’t be objective when a single issue is at stake.

Perhaps some of the outrage over this kowtowing is overblown. Is it the bread and circus moment for US equities? Probably not. Maybe there does need to be a special process for the megacap IPOs that have grown so large in private markets.

But you don’t debate strategy when you’re face to face with the enemy. That’s for after the battle. Right now your only job is to hold the line.

It’s not always what or how you win, but when you win.

In a tennis game the other night, the winners in a best of three sets match took the series 6-4, 1-6, 6-4. The losers won more individual games (14 vs 13), and therefore more points. But they still lost.

There are several ways that could happen, and all of them are frustrating. You see this in any sport where matches are tallied as the aggregate of individual scores. And it’s not just beer league tennis - the 2013 NBA finals saw the Spurs scoring five more total points but losing in seven games to the Heat.

The obvious similarity between these two examples (besides the level of competition) is that the loser lands a major blowout in one of their winning games. Dominating your opponent in one feat might feel good at the moment, but it still only notches one win.

The rules are known well in advance to all, and taking advantage of scoring aggregation dynamics is its own form of strategy. If the players who won the first set find themselves down 4-1 in the second, it might make sense to quickly drop the next two games and save your energy for the rubber match.

For sports that are won in best-of series, or playoffs that are earned across the wins and losses of a season, consistency is rewarded. It’s better to win a lot of close matches than to put on a performance clinic one lonely evening.

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The teams that can deliver the blowouts are often the same ones who win the close matches. But there are many exceptions. Lots of games are played because you want to eliminate the luck factor.

Another way of thinking about that is you want to remove volatility from the results. Variance is not just constrained to financial markets - they just happen to be a very quantifiable demonstration of it. Choosing the victor of New Canaan vs. Redding is no different than measuring the best performing stock of the year. The overall winner doesn’t take every game or close the highest on every single day.

If you’re going to disaggregate performance into the daily, weekly, or monthly slices that make up a year, where you draw the lines matters. Trading an options strategy, every expiration is a performance line in the sand. Settlement doesn’t care about what you did last week or will do next month, it’s all about the print at 4:00PM eastern on any given Friday.

By creating time buckets of performance, you’re taking an opinion on volatility. Direction comes on its own schedule, and the path is never straight. The weighting flows of buyers and sellers bring valuations closer to truth - over time. When the true value is uncertain, we will see a wider range of prices along the way.

Selling a covered call is defining a stock’s performance within a specific period. If you own equity outright, the best case scenario this month is unlimited. With a short call option it’s the strike price plus whatever you collected in premium.

The biggest question in an overwriting strategy is where to draw those lines in time and strike space. If we look at a stock’s history and expect it to go up 12% in a year, you can’t just sell 1% OTM calls every month. For reasons of path and compounding, it doesn’t break down neatly.

Last year SPX was up 16.3%, and 92% of those dollar gains took place in only three calendar months. May, June, and September saw 6.1%, 4.2% and 4.4% gains. If you sold a 1.33% OTM call (16% total performance divided by 12 months) it seems like you might be giving away a lot of upside. Is the premium worth it?

In June and September implieds were similar - around 12-14% - and so the 1.33% out of the money call was a 40 delta, and worth just over 1% of the underlying. May was still spooked by the great Tariff Tantrum, so you had an 18% vol call worth 1.5% of the spot. The best case scenario for June/September you can make up to 2.3% in a month with about 50bps more in May. Which leaves almost 9% on the table across these three blowout months.

But overall the premium collections are meaningful - this is the real draw to the strategy. At an average of 1.19% per month there is significant cash flow. That cash can compound both for and against you. When stocks are realizing less than that 1.33% increase, you have extra cash to buy more shares at lower, or at least less high prices.

While drawdowns are painful and less money is usually worse, upside volatility is your drag versus the benchmark. We can see below that it’s the May, June, and September periods when the covered call underperforms. When the benchmark is compounding above your strike, the strategy falls further behind.

For calendar year 2025 the monthly 1.33% covered call runs very close to the index. But this whole experiment was stylized knowing the total returns of the index. Even if you had a Magic 8 Ball, a covered call is basically even with buy and hold. The SPX-Write also assumes perfectly frictionless compounding, and the ability to overwrite 100% of your shares at all times - not practical without very large sums of money.

Longer term average returns are closer to 10%, so selling a closer to the money call at 83bps might be more reasonable. Interestingly, there’s hardly any difference in returns. Slightly higher lows, and a few bucks more at the end of the day.

As I’m fond of saying, it’s incredible how well volatility is priced these days. The upside premium collected in exchange for the right tail of returns was a very fair trade in 2025. That’s not always the case though.

In downward trending markets the 1.2% a month cash is some padding, but it’s not exactly a real offset. What you really want to think about with the covered call, is the upside directional volatility. Does this stock or index have the possibility to spiral up all at once and leave me totally behind?

Sports scores don’t compound, so there’s no advantage to winning when you’re already ahead. A game is a game and a point is a point. When your financial returns come is very meaningful. Volatile results hurt a team because they’re going to notch up more losses. But as we get into higher volatility stocks, the drag on compounding becomes more significant.

If you look at the skew curve, and plot the covered call strike, it’s fairly obvious that you’re selling upside volatility. But what exactly that means gets obfuscated by premiums and potential upside.

Whether buying or selling options, when matters. If the sequence of returns is unfavorable, you might find yourself winning games but losing matches.

We live in a world of very powerful tools.

I’m not just talking about the chainsaw I picked up last summer. My wife is still (rightfully) scared of it, but it has been impactful on several important occasions. Helpful in resolving issues of tree level complexity.

This is not yet a rant about AI agents either. The Opus 4.8 model is pretty dope, and whether I’m coding or searching tasting notes, the world is increasingly and usefully being filtered through an LLM.

The right tool in the wrong person’s hands can quickly have a dramatic impact. Don’t hand your child a garden hose to wash the car if you don’t want to get wet too.

Markets are a tool. They are an agreed upon set of rules, coded into a pile of servers, that allow for participants to exchange cash for securities or vice versa. The more activity there is, the better the tool becomes. Unlike an axe, heavy usage at high frequency is very desirable.

Activity and liquidity are a self reinforcing flywheel. Everyone benefits from greater participation. Spreads get tighter, size gets deeper, and trading gets cheaper. A vibrant marketplace becomes a fertile ground for innovation, and more new products get the chance to see the light of day. Even if most of them fail, you only need one VIX to build an empire.

The improvement of tooling is generally referred to as technology. But that’s only part of the story here. While that adds fuel to the fire, the real boost to the market flywheel is access.

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To a professional trader, market access means which exchange allows you to pull FIX lines into a matching engine. It’s a quasi-technical term about permissionings which defines whether you can directly place bids and offers on an exchange or whether an executing broker does so on your behalf. DMA (Direct Market Access) requires both capital and savvy.

In a broader sense market access defines how the buy side brings their orderflow to the table. This is a soup of technical, political, and educational factors.

Innovations like mobile trading apps clearly facilitate retail trading. Putting options markets in a palm sized device goes a long way to making markets more accessible, and has a direct impact on the amount of non-toxic orderflow that hits the tape. This raises the quality of markets for all, as liquidity providers compete to drive prices tighter and tighter.

Technology also has an impact on the operational side of trading. Even with a fancy user interface, brokers need the backoffice tooling to manage their own risk books. The adjustments to the pattern day trading rule are long overdue (but less than a week away!), but the new intraday margin system couldn’t exist without innovations in backoffice technology.

Policy and lack of policy play an important role here. We don’t get rule changes without the regulatory bodies getting involved. The Exchange Act of 1934 is the benchmark text that defines the high level goals of markets - most importantly the protection of customers. While 90 years of pushing at every corner case to make an extra buck has stamped out a lot of precedent, money invites creativity.

While it’s not written anywhere, the distinct policy goal of the last decade seems to be market access over everything. Feed the retail beast, and give them any product with remotely financialized applications. Digital assets tested Howey so that prediction markets and sports gambling could run wild.

More participants accessing markets might improve liquidity - but it doesn’t necessarily improve the customer experience. The potential is there, but it only manifests in your results with the right amount of education. With more choices than ever, King Retail is in desperate need of guidance.

The good news is that there are dozens of widely accessible sources. The bad news is there are thousands of charlatans and promoters chirping in the feeds. Access to markets and content creation does not discriminate by honesty.

Depending on your point of view, certain institutions are also pushing this limit. Brokers have famously been chided for adding confetti to their trade confirmations, but more subtle product nudges and offerings can be just as dangerous.

Agentic solutions are the buzzword across every industry - so it’s only logical that they are coming to retail trading. Thanks to technology and easy access to liquid markets, artificial intelligence driven trading will soon be possible at the world’s largest options brokerage house.

Both packaging and automating solutions have been core competencies of the financial industry for years. Whether it’s direct indexing or the proliferation of systematic ETF strategies, wrapping the unique and complicated up with a neat little bow pays a lot of bills.

There are now more ETFs than individual stocks, and the count of grocery store sushi options strategies has exploded. We may see the tide turning here as one major provider announced the shuttering of a half dozen with low AUM.

The conflict here is a choice between adding paternalistic guardrails or leaning into better educating the consumer. Regulations are notoriously difficult to get correct, and even if you think it’s not responsible for a small account to actively flip round turns, rules like pattern day trading show the adverse effects of codifying that.

Market access is important to maintain not only because it feeds liquidity and raises the tide for all boats, but also because the only way to learn is to get your feet wet.

The only solution is to double down not on parlays, but on education and guidance. I’m talking my book as an advisor, and while I’m strongly in favor of making all these tools and products available, I’d issue just as strong a word of caution.

A tool that automatically trades when certain criteria are met, or rebalances your strategy so you can spend Friday afternoon elsewhere is very powerful. But just because you can doesn’t mean you should.

Every trade needs to have a reason behind it. Weekly options aren’t listed in COIN and HOOD so you can turbocharge distributions. The best trades exist because there are structural dislocations or risk transfer opportunities.

The path to finding those is littered with bad trades, self reflection, and lots of reading. I’m excited to use and even help develop some of the new ways that retail traders can access the markets. Just make sure that before you launch autopilot, that the chartered course is true.

All alone on a Thursday night.

My daughter is sleeping upstairs, my wife is out with her friends from the library, and Thai food is on the way. After three sets of singles tennis, I deserve all this and a glass of wine.

I’m feeling good, Louis. Time to dial up “Trading Places.”

Everything about this film is on point. You have slapstick funny. There’s satire. Both genuine romance and bromance. You don’t have to know what a commodity is to appreciate how good Eddie Murphy, Dan Aykroyd and the entire cast are.

Yet no film does finance perfectly. It’d be rather boring if they did. The plot to steal the crop report is somewhat far-fetched, as are the tremendous consequences for each side of the trade. That said, today we live in a world where Polymarket bets are rigged with hairdryers at the airport and military coups are front run.

What the film nails is the importance of the environment for traders. Before there’s any scheming about the Department of Agriculture’s results, the original sin of this movie is the bet between the Duke brothers for their usual amount: $1.

Two extremely wealthy commodities brokers, they have made their fortune facilitating client access to the world of coffee beans, frozen orange juice, and cocoa. Then one cold winter day, in the few feet between their social club and the Rolls Royce, they have an unfortunate run in with a temporarily legless Billy Ray Valentine who was begging for money.

Randolph Duke has been reading some contemporary academic literature in his free time, and believes that Billy Ray is a product of his environment. Mortimer is the polar opposite, convinced that character is innate, a product of genetics. To test this theory, they pull off an extreme feat of social engineering, and swap the life of their successful young protégé Louis Winthorpe III with Billy Ray.

Hilarity ensues. The subjects slowly realize their situation, and proceed to turn the tables on their elders. They retire to a life in the islands where the biggest decision is between lobster or cracked crab.

Before they land on the beach, Billy Ray prospers in the experiment with his new found wealth, and quickly becomes adept enough to help engineer and trade their revenge. Nurture wins - environment and opportunity are the prevailing factors in determining individual outcomes.

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The Duke brothers weren’t the only pair to make this bet in 1983. Real life commodity traders Richard Dennis and William Eckhardt made a very similar wager. Dennis had been wildly successful, and (unlike many who get lucky in the business) attributed this to the system that he had learned. It wasn’t his intuition or natural prowess, but a structure of risk management, diversification, and discipline.

Eckhardt didn’t quite believe this, so they set about testing their theory. The pair developed a training program, and funded traders with their own capital. The nickname for this group became the “Turtles”, as they were growing successful risk takers.

The training program lasted only two weeks. There was no fundamental analysis or market structure knowledge required. The system was rote and mechanical trend following. Cut your losses and ride the trend.

Entry signals were about breakouts. Buying when the market touches a new high, and shorting as it tests new lows. They would favor the more liquid products as this reduced their slippage and allowed for easier exits.

Sizing was also very important for the Turtles. At entry the position size was a function of the market volatility. If a market reversed, they quickly got out for small losses. But they pyramided their winners adding as positions went in their favor.

Another famous 1980s trader espoused the same strategy. While Paul Tudor Jones is famous for calling the 1987 crash, he’s also said that he made that same bet several times before he was right. The stops were just very tight, and when it started working he piled on.

There were roughly two dozen Turtles, and while no exact figure is available estimates are between $100-$200 million of profit between them. Something clearly was working.

Now if this sounds like a pitch for a trading course - there’s a major asterisk that needs to be emphasized. The fact that a rules based system can be applied successfully is only part of the story. There are plenty of inherent traits that make for a successful trader, the devil is testing for them.

A foundational strategy of most successful market making firms is their training program. But even when you’ve been doing it for forty years, the true success rates are very low. Screening for successful candidates is notoriously difficult, because with all the attributes on paper, there’s no substitution for the ability and wherewithal to put it into practice.

The Turtles knew this too. If there is any innate component to trading it’s not about a savant-like ability to manifest direction from the ticker tape, it’s temperament and mental fortitude. Pick two stereotypical college athletes sitting at the top of their class, who also happen to be chess club champions, and within five years there will be two commas separating their results.

In the technical analysis world of momentum trading, this comes down to the ability to trust the system, not your gut. If prices feel too high and you can’t buy that run up, you’re spending too much time with your emotions, the market doesn’t care. And if you’re coming back for revenge trades, say goodbye to your capital account.

Good market makers go through a training program that’s closer to two years than two weeks. There’s a lot to understand academically and experience personally.1 The risk manager can lecture for hours on the dynamics of hard to borrow, stock loan, and Reg-SHO. But when the stock fails for ten days in a row and you’re forced to buy conversions somehow, you’ll have to see it to believe it.

Knowing what a real edge looks like and where it comes from can only be earned through calluses on your mouse finger. The repetitions are invaluable. And as flows adapt or new mechanisms evolve, you must always be training.

The bet isn’t as clear cut as the Dukes or the Turtles make it out to be. In both these cases it seems like training is what’s required for success. Good training is more like a prerequisite. Whether that comes from a formalized program at a prop shop, or any of the valuable education available to retail traders, a firm grasp of what is and isn’t part of your strategy is table stakes.

The nature part is more nuanced. Perseverance and discipline feel like something anyone can have - and that’s true. But thousands of brilliant and dedicated people have failed. So prove them wrong, and hope for a little luck.

The feel of a crisp binding and smooth cover is a sensual experience. When the spine cracks and the edges fray, a good book develops even more character.

I’m hardly the poster child for this preservation society - most of my reading time is on a kindle. Convenient enough to fit in my pocket and practical enough to hold several dozen volumes. But hardly shelfworthy.

I’d like to believe it’s the content that matters. Engaging or well curated writing should cut through the medium - and yet, if I get passed a QR code or a tablet in a restaurant, minus two points off the bat.

Hemingway may have ruled the Left Bank, but there’s something different about turning the pages at La Tour d’Argent. In this bastion of haute French cuisine they wheel over a little cart, upon which sits a four inch thick, bound leather volume. Vertical after vertical of every prestigious estate. This isn’t a tightly curated Man Booker shortlist, but an Encyclopedia Britannica of every bottle of wine that matters.

Just like the perfectly choreographed service, and tables aligned so that everyone gets a view of Notre Dame - this is as much about the show as anything. In fact, if you look at most Michelin star restaurants, their wine lists are pretty similar. Krug and Dom Perignon appear on 42% of these. Good bubbles for sure, but hardly an insightful selection.

Pairing is a complex balance of the individual, the product, and the context. Defaults are useful, but judgement is singular.

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It’s easy to say what the most expensive wine is, or on any given evening what the wine of the night was. But other than Chateau d’Yquem for Sauternes, there really is no objectively best wine. For you, the food, or Bob your uncle.

If either wine or data tickle your fancy, you won’t find a more interesting article than Sara Danese’s analysis of the wine lists at over 1,000 fine dining restaurants. As prices for these luxury experiences soar (the average three star charges $365 for their tasting menu), the wine prices have followed, and that’s turning people off.

There’s a question of not only the homogenization of these products, but also the lack of reasonably priced, or even good value for the money wines. If you’re spending $50 or $500, the only thing worse than a corked bottle is overpaying for something underwhelming.

Whether you’re in fine wine or high finance, beige is not the color to be. Especially when you’re being charged for sparkle. And yet in both of these domains there are significant structural factors that are leading to increasingly generic experiences.

In the wine world, there are a few palates- collective or individual - that exert outsized influence over price and taste. Robert Parker famously bent the world’s wine regions to produce his ideal expression. Institutions like the Court of Master Sommeliers create a standard for which regions and even producers are the most “typical.” I’m a sucker for that pencil shaving, burst of violet Pauillac, but that doesn’t mean it’s the only way to make wine in the Médoc.

If there is any individual that has shaped the hive mind of investors, it’s Jack Bogle. The king of indexing, his legacy lives on in the many Boglehead communities out there, dedicated to low fees and diversification.

Parker got many things right, and I’m generally inclined to agree with Jack. The cheapest and broadest exposure to the market is my baseline for crafting any portfolio. Particularly for the amateur who wants to spend their time on something more interesting.

The critiques of indexing center around things like governance and price discovery. If investors aren’t making active decisions about how well a company is managing its opportunity or what the fair value of that is, the market prices become distorted. There’s a whole canon of literature about the significant and structural “passive bid” out there.

It’s good and practical advice, but not exactly Michelin star quality. If every smashburger served under an edison bulb tastes exactly the same - frankly that’s a win. But when you’re paying fine dining prices, you should be getting something unique and personalized.

The pairing analogy extends here also. While I’m a deeply biased Francophile, the fact that 60% of lists are controlled by these (exceptional, unparalleled) regions, isn’t exactly a unique insight. Burgundy is the ideal pairing for a coq au vin or any of the mother sauces. But if I’m in Turin or Tokyo, you want something more contextually appropriate.

The “Risk Test Questionnaire” is how advisors are meant to pair their clients with the appropriate investments. Yet for the most part these are less than a dozen multiple choice questions with a High/Medium/Low scoring system. I’ll talk my own book here and say there are a lot more ways you need to think about risk with an options strategy.

Timing matters for both the soufflé and the market. People change, circumstances arise, and performance shifts. Matching individuals to investments is a dynamic process that isn’t necessarily served by default options, no matter how good they are. If you’re doing this on your own you need to stay vigilant, and if you’ve outsourced it you need to stay on top of your advisor.

No matter what business you’re in, you’re going to work with distributors. Wine and investment products both thrive and suffer from the access this group provides. Gatekeepers of the product, their menu dictates what’s available.

In a 401(k) we’re often stuck with lackluster options because of the company’s fiduciary responsibility, but also because of what a given broker is willing or able to provide. Many advisors access the markets through platforms which allow them to outsource everything from research to model selection and rebalancing.

The choices available to managers are going to dictate how they’re able to serve you. Dividend futures might be the perfect slice of risk, but without access to the CME or an ETF that wraps this, you’re left to either DIY or accept an alternative.

While restaurants might have to worry about the health department, it’s nothing compared to the regulation elephant in the room for the financial industry. For the most part the rules are good and well intentioned. I have very high praise for the comment and rulemaking process.

But the rules often leave practitioners running scared. Perhaps in the same way that Michelin’s proclivity for precisely composed dishes threatens every three star to look the same, the risk of being different is severely punished in asset management. Creative isn’t always synonymous with snake oil or high risk.

Sitting in the customer seat, you’re absolutely in charge. Retail traders have more power than ever, but that doesn’t eliminate opacity. The savvy customer pays attention to the forces behind the scenes.

There are still a few bargains out there on wine lists, though I’m not telling anyone where. And the best restaurants and advisors are absolutely worth the price tag, it’s just worth knowing where the value is, and what the forces are that shape it.

The point is not to reject the house list or the model portfolio. The point is to know what you’re paying for convenience versus what’s real insight.

“I love a good boondoggle.”

I thought I had my lead and then Lex drops that line - sometime after we demanded the perfect martini spec but before the omakase sushi dinner.

While the flip side is I have to stay up past midnight talking about options, I’m not going to shy away from the fact that this is a really fun environment to do so. We might not all agree about politics or obvious error rules, but this is the room where it happens.

As a youngin with only the experience of a library card, the first time I came across this idea was reading the book FIASCO by Frank Partnoy. The title comes from a legendary/notorious annual event the Morgan Stanely derivatives traders would hold - Fixed Income Annual Sporting Clays Outing.

It’s steeped in exactly the booze soaked, macho culture you’d expect out of a 1990s investment bank. What better way to impress clients and each other than to get hammered and flex your killer instinct. Today we just show off golf polos.

With vague notions of team building and client servicing, the boondoggle event is mostly centered around personal pleasure. Yes there are productive meetings, but really it’s the potential of that future phone call. Here’s to OIC 2026. And a wildly successful launch of TraderFest.

By nature you’re away from the everyday. Mobile access to email and schedules mutes the separation, but no zoom call replicates the begrudging round of drinks you buy for frenemies. The exclusivity opens up conversations - Chatham House Rules more or less.

But many of us didn’t need to be present to be there. More than ever the one person not in the room but very much an elephant was retail. Sure they are represented by their brokers and advisors, but the capital R word inflected every conversation. Individual trader volume is what has trebled the size of this business in less than five years.

If you’re not a professional you’re retail. That’s not pejorative, because I firmly believe that many institutions are trading with approximately the same sophistication as the guy on his phone or the gal with a couple spreadsheets and a lot of motivation.

Retail is not a homogeneous mass. Anyone who isn’t streaming two sided quotes or facilitating market access gets lumped together. But there are many shades of customer.

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To be frank, many have no business trading options. If you’re a surgeon that expects to make 40% a month - get bent. Stick to cutting people open, I guess. Whatever you see on FinTok is absolute nonsense.

We all come to the industry with some motivation and optimism about the potential earnings. But the speed you discover your own stupidity is the purest sign of intelligence.

To be clear - stupid is a very important developmental exercise. If you’ve got more than 50 years before social security kicks in, go ahead and make a lot of mistakes. YOLO . Your horizon allows for a lot more risk taking. Most 60 year olds know there’s no crying in the casino, but more buying power to you if that lesson comes early.

For as long as I’ve been part of the conversation, there’s been a question of how the business can appeal to more natural flow. What is the right amount of “window dressing?”

Customers are not just tickets to punch, they’re the drivers of price discovery. Market makers don’t move prices ex nihilo, there are simply more buyers than sellers. The more the better.

Education is a persistent theme. Whether you were raised on Natenberg or Moontower, continuing that journey is mandatory. There’s always something to understand a little bit better.

The trading world is rapidly becoming a more complex environment than ever. The range of positions you can take is exploding. Prediction markets have everyone’s attention because that’s how lots of money both new and old wants to trade. I have to smirk at the fact that a “new” binary product will simply settle as call or put spreads.

But that’s exactly where and why education is needed. If you can do anything, what’s the right thing to do?

Options have always been about understanding outcomes. There’s a reason they ask a lot of probability questions in interviews. The path through stupid requires you to momentarily believe that premium is annualizable income. The clock is ticking though.

It’s not just new product types, the variants within our standard wrappers are spawning. There are more ETFs than single stocks and the cat is out of the bag and across the field. With dozens of doubles, inverses, and income products you could trade an entire complex of TSLA. SPX/SPY/ES is for the olds.

Volatility as an asset class is no longer an institutional delusion. I’m going to be particular and insist it always has only been about that. It’s an embedded feature of any allocation. But there sure are a lot of ways to trade “it”, and it’s very unclear how any of those productizations of deviation exposure will pay out if there’s ever a vol event again.

The buy side of market liquidity is increasingly global. The 24/7 or 23/5 conversation is happening not just because the dentist from Peoria wants to queue his orders before work but because there is someone from Singapore who wants to trade the world class liquidity available in our markets. Migrating to an always on market structure is a patriotic imperative.

Retail traders are no longer a fringe participant but a cohort who can demand 20% of a highly sought after IPO. They are pushing the industry to cater to them when and how they’re available. When your first market experience is a crypto wallet or a parlay, batch files and processing time for settlement seems less quaint than backwards.

The surge in volumes that’s been a rising tide for all participants is almost entirely due to individual trader volumes. Asset managers and funds are getting a little bit more involved, but the lion’s share of organic growth is from users who are trying to figure it out on their own. That leads to a lot of 0DTE volume, which might not be totally constructive, but it opens the door to better and more risk conscious opportunities.

The service side of the industry is rapidly adapting - through the structuring of products, the purchasing of hardware and infrastructure, or the global availability of trading hours. While retail might be driving the conversation, it’s important that the response comes back with a solid dose of education.

With twenty years in these markets, I’m still sitting at the front of the lecture hall vigorously taking notes. Asking questions outside about why or how something works. Retail might be the boss, but the role of the consigliere is more important than ever.

Your martini is 30% water.

Whether it’s shaken or stirred (sorry Bond, the latter is technically correct), the process of mixing vodka or gin with the appropriate amount of vermouth introduces a significant amount of H20 into the cocktail. It’d be unpalatable otherwise.

The laws of thermodynamics require that to deliver a chilled beverage, the ice must absorb the room temperature heat of the booze. When vigorously shaken, you introduce more water into the drink because the mix comes into contact with more surface area faster.

Everything from the size of the ice cube, the starting temperature of the mixture, to the proof label will impact the dilution ratio. How you prepare the drink has as many variables as the twist/olive, gin/vodka, dry/dirty parameters that start the mixology.

While everyone is allowed their own preferences, the stirring method is classically preferred because it not only results in a slightly stronger drink, but it yields a more silky texture. Shaking is typically reserved for drinks with fruit juice, or if you need foam like an espresso martini. Micro air bubbles get introduced, and with a clear alcohol the result ends up looking cloudy or bruised.

Ex post rationalists justify Bond’s preferences because at the time Flemming wrote the novels, the quality of spirits was significantly worse. A few extra drops of water helped cut that taste. While he’s been academically classified as a drunk, in the early years he actually preferred champagne to martinis.

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It was reading about a swanky new cocktail bar in Midtown that I learned just how much water goes into the martini. Bar Chimera has gone so far as to create their own water recipe for the ice that gets shaken into your drink. Famed for its quality and excellent for pizza and bagels, New York City tap is particularly soft after being rigorously filtered. That compares to mineral waters like Evian with 26mg of magnesium and 80 mg of calcium per liter.

Most cocktail orders are focused on the spirit and the style. Don’t get me started on an extra dirty Grey Goose martini. But the same dilution question holds true whether it’s a vesper, boulevardier, or negroni. Apparently if you’re not paying attention to your ice cubes, you’re missing 30% of the picture.

When I talk to options traders, I see this same ratio in reverse. Everyone wants to talk about the parameters for how to trade a covered call, when 70% of the picture is the choice of underlying. Before you worry about moneyness and expirations, zero in on the stock pick.

You can trade a covered call at any level you like, but most commonly I see these set around the 30 delta level. Very far out of the money and you’re barely diluting one hundred proof. On the other hand, deep in the money overwrites are mixing vermouth into a pint glass of water- a unique preference.

At inception, this is taking away 30% of your underlying exposure. For every dollar the stock goes up, you’re only making 70 cents. And over time that changes. The greeks “go away” at the extremes, and the position at expiration is going to be all or nothing.

Nowhere is this more apparent than the downside. The choice of underlying here matters for a fundamental synthetic reason - a short call + long stock = short put. This synthetic relationship highlights exactly what’s going into your concoction.

There’s a reason junior traders practice synthetics until they become second nature. Every options structure can be reframed by inverting calls, puts, and stock position. Adding a “dividend payment” to your long stock sounds much more attractive than being short puts, until you understand exactly what you’re doing.

The risk in a covered call is mostly to the downside. Of course you’re giving away the right tail too, and equity risk premium is the compensation for bi directional volatility. Despite all that, it’s still hard for me to place positive under performance in the same category as losing money.

Understanding that a call overwrite is the same risk as a short put helps frame this. You get paid a little bit of money, and if stock goes down your delta offset in the call goes away, and you start losing dollar for dollar. That drink gets a lot stiffer with every downtick.

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The reason I cringe when someone orders an extra dirty Grey Goose martini is because they have no idea what they’re spending their money on. As any poor college student will tell you, it’s easy to replicate French vodka with the plastic bottle stuff and a Brita filter. While it’s fine to dump olive juice in your cocktail (here you’d shake as I shudder), doing so further masks the illusion that an expensive vodka provides.

This is like calling the return from covered call income. You’re spending your risk budget in a completely incoherent way. The psychological trap of thinking there’s an extra income stream obfuscates a clear set of up and downside risks. The pennies don’t protect the dollars.

If you’re surprised about all the little details that go into a martini, just wait until you dig into the operational complexity of option’s simplest trade.

Long options have their own drags, but a fundamental difference with a short is that you’ve given someone else all the power. They can exercise whenever they want. While there are economically rational and predictable times this happens, it’s still something you have to watch out for, particularly if you made too good of a stock pick and the underlying moves up quickly.

Tax considerations are real too. There’s the qualified covered call rule that technically considers any option written on a stock with less than thirty days to expiry as a functional sale of your stock. While it’s going to be very knotty to prove that, it’s absolutely worth being aware of.

Any time you add another position to the portfolio you’re introducing risk. Besides the directional nuances, there’s the time required to monitor and close the position, and accounting to clean up at the end. No matter how good your picks are, if you can’t maintain a process, it’s not an edge.

I love the covered call for its simplicity. I feel similarly about a martini. But perhaps instead of Churchill’s famous nod in the direction of France for its vermouth, we should be pointed towards Évian-les-Bains.

The Interborough Rapid Transit Company held the base fare for the subway system at five cents from 1904 through 1948.

Two World Wars. A Great Depression. Consumer prices roughly quadrupled during this period. And while the stock market had not yet reclaimed its 1929 peak, it was more than double the starting level.

In real terms that nickel from 1904 was closer to a penny by 1948, and though ridership steadily increased, the unit economics here were destructive. The primary cost centers of labor and electricity were exploding while revenue stayed flat.

If you think the current MTA is a cash quagmire, at launch the IRT was privately owned, and the investors also expected dividends. Transportation stocks were popular early in the century, but the 1929 crash laid bare the flaws in this system and investors fled the sector completely. Ultimately New York City was forced to take over a crumbling system in 1940.

Raising fares was politically and legally untenable. A nickel for the subway was not only the expectation, it was baked into the ninety nine year land lease the companies were granted upon construction. So the IRT was forced into other cost saving measures. Mainly deferred maintenance.

Wooden and steel cars ran long past their lifetime, and the worn out suspensions and flattened wheels slowly raised the volume underground. Ornate tile work, brass fixtures, even skylights of the post Victorian era were abandoned, and nature took over. Ground water rich with salts leaked in, forming the stalactites that are still visible today.

Technology advanced in leaps and bounds over these four decades, but the IRT couldn’t afford to keep up. The company operated its own massive power station at 59th street, but this was coal fired and wildly inefficient. The labor intensive system was not only expensive, it was prone to blackouts.

The long decline of the IRT was a slow moving train wreck. It was obvious to everyone what was happening, but inflexibility and stubbornness let this persist another day. New Yorkers started preferring cars and buses, and the death spiral continued.

When the system was brand new and riders were just getting used to barreling through underground tunnels, fare hikes would have likely stymied the initial growth. But by 1940 it was clearly too late. So when is the right time to raise prices?

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Not every up or down tick in commodity input prices is an excuse to change your retail prices. Other than gas stations and heating oil, most businesses will buffer their back end costs so the consumer sees a fixed price. Inventory and labor management are all part of the margins they build in.

With actively traded securities, the question is not much different. The fact that options prices are rapidly moving every single day is a canard. What they’re really pricing - liquidity - moves on a much slower arc.

Options 101 teaches you that when you buy a call, you are purchasing the right to buy the underlying stock at a fixed price, on or before a certain date in the future. The value of that right is highly correlated to the price of the stock for very obvious reasons. Stock goes up - calls go up, puts go down.

That’s a purely mechanical relationship. There’s almost nothing subjective about what Microsoft stock is valued at, or how the ebbs and flows will affect the 3606 calls and puts listed there today. But basic stock movement isn’t really changing the price of that option.

If you know enough to be dangerous, you’ll tsk tsk and ask about spot:vol correlation. What an option is ahk-tually pricing is implied volatility. Underlying moves are but one dimension of the overall price, and the future expectation of movement (or lack thereof) contributes all the extrinsic value. If there was zero expectation of stock movement, the option would be worth its settlement price today.

Supply and demand push implied volatility around. Preferences for calls or puts at given strikes shifts the skew curve and relationship between different strikes at the same expiration. More sophisticated pricing models start to make assumptions about how if stock goes down, implied volatility is also likely increasing, and your downside pricing should reflect that.

Implied volatility and skew absolutely need to be repriced. So do interest rates. As the market digests new information through orderflow and trading activity, the price of options will also adjust. This is not done by a cabal of dealer price setters, but an entire ecosystem of shifting and trading.

While a good liquidity provider is aware of what constitutes high and low volatility for a given underlying, that is not the primary pricing lever they are adjusting. A good manager of inventory is constantly evaluating the spread they are charging to assume their next randomly assigned position.

In a highly competitive market that is trading tens of millions of contracts every day, the basic components are very well priced. Volatility risk premium has declined steadily over the years, and only tends to pop when we have idiosyncratic events. Prices shift quickly back into line.

If the institutional side of the market is rapidly and efficiently adjusting the fair value of an option, what prices should a buy side customer be focused on?

Starting with the assumption that the option value is good, the active trader or portfolio manager needs to evaluate a different dimension of costs and revenues.

For strategies that are built on backtests, it’s extremely important to continue to test the assumptions. Is the signal still valid? How does a changing volatility regime impact this? Because the answers to this don’t immediately shift day over day, it’s easy to let it fall into the deferred maintenance category.

No matter where your position comes from, every little cost is going to be fighting your potential returns. Fees, borrows, etc of course, but also the implicit cost to maintain that.

Everything looks clean when you have a trading formula that rebalances at X or Y level, and hedges when deltas exceed Z. But the reality is that many, if not most, traders fail to stick to their guns and stay disciplined. The deltas that slipped through because you weren’t at your desk. The covered call that expired on Friday because you were out golfing.

The most serious threat to an options portfolio is deferred maintenance. Over time the little mistakes compound. The steady nickel that comes in every time is masking what happens under the surface with missed opportunities, errors, and fees.

Price is the most important part of a trade - at the surface level it’s the only determining factor in your PnL. But overtime it’s the cost of maintenance and upkeep that really impact long term performance.

The daffodils were early, but spring break came late this year for Redding.

After watching the neighboring towns come and go, finally it was our turn, and we took the opportunity to visit friends and family in Omaha. This was a good excuse to dial back the hours, spend some time riding the big slides, and drink a few great bottles of wine. (Since it was already 85 degrees there I’ve got a summer preview - treat yourself to Pascal Cotat’s Chavignol rose - 100% pinot noir and 1000% the best pink juice you’ll taste.)

One of our favorite restaurants in town also doubles as a wine shop. They don’t have a bottle list, but you can walk up to any of the shelves and pick out what you want. With only a corkage fee on top of retail pricing, it obviously pays to get a good bottle.

I explained the wino logic of how much money we’re saving by drinking premier cru Burgundy to my wife. At a restaurant y= (1+m)x, where m is the percentage markup of bottle costing x. With corkage, y = x + c where c is a flat corkage. For all bottle costs x where c < mx, you win. Hold c and m at standard values, and the x value of breakeven is pretty low. And the spread between those curves increases linearly with x.

But I digress - more importantly my daughter had a different question. Newly obsessed with tooth fairy income, she sat there doodling dollar bills with our dog’s face on them. “Daddy, did you pay for that? (Double eye roll included.)”

Eventually I would, but until the check hits the table this was all on credit. While it isn’t exactly framed this way, the establishment is sizing you up and hoping you’ll cover the consumption. When you select, pull, and open the beverage yourself, it’s all the more obvious.

I’m very wary of using margin in my brokerage account, but I hadn’t considered all the restaurant bills that I was getting spotted 0DTE bottles.

It was ironic that later that day I got a text from an old friend and former colleague - “Your letter was the straw that broke the SECs back!” Even on vacation, this was something worth digging into, never mind it was after 5 o’clock somewhere.

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I knew he was talking about Pattern Day Trading (PDT), because this has been my main regulatory axe as an advisor to retail traders. Finally, as of this week, we have the framework for a coherent and universal intraday margin rule.

Rule changes move at a glacial pace. Traders have been bumping against this limit for years, but in a world of 0DTEs and inflated account values, it has become increasingly absurd. We might not agree with every tweak that FINRA, the SEC, or any other badged up body does, but the adjustments to PDT rules have been met with near universal approval.

The broad strokes of the rule convert an archaic gatekeeping into something that is holistic and forward looking. Now, rather than handicap margin rules based on trade frequency for smaller accounts, every participant is subject to the same shock test.

I’m a fan of this rule for two major reasons. Primarily, it harmonizes the margin requirements for accounts of every size and eliminates capital prejudice. Further, it guides the management of the market’s at risk capital towards a real time monitoring, reflecting the risks being traded.

It’s the principle of the old PDT rule that annoys me. Actively trading options when you have less than $25k in your overall risk bucket deserves some serious reflection. But there are dozens of practical reasons why a given account might have less than $25k and you want to make an options trade or series of trades that are perfectly appropriate.

A year and a half ago I wrote “Dear FINRA”. I praised the comment letter process, and posted my own letter on Regulatory Notice 24-13. Sixty five others joined me, nearly all of them supporting a review of the current rules.

The main reason this rule is bonk is because it creates unfair complexity. Not only are there different buckets with different systems to manage, one is distinctly prejudiced. The small account has an arbitrary 5 trade per 4 days cap to allegedly manage risk and margin for an active account. Trade count is a very poor indication of actual risk.

With the April 14th Release No. 34-105226, every options trader (and equity investor) is on the same page. That simplifies a lot! It seems trivial to monitor count of trades and account equity, but any complexity is risk, and the result is punitively imprecise.

Previous PDT rules could prevent a trader from closing profitable trades, and were generally prohibitive to 0DTE strategies. This distorted market structure, and was a headwind to the most important thing you can do in trading - learn. (And secondarily manage risk.)

Beyond just eliminating this false barrier, the rule change gets closer to addressing the true concerns of margin in the market ecosystem. When traders are using leveraged capital to take positions, there’s a risk they won’t be able to fund the settlement and thus put a strain on other participants. It’s important for every buyer and seller to know their counterparty is good for it.

The new concept of “intraday margin level” requires that all brokers keep track of an account holder’s equity value throughout the day, and implement either real time or end of day calculations to block further activity should the account have insufficient equity at any time.

The reality here is that most “good” brokers are already doing this. Large platforms are already tracking equity in near real time, and active traders have probably noticed calculations in their terminal called something like “Post Trade Margin”. It behooves a credit provider to know ex-ante what the impact of a given order might be.

Outstanding orders will generally lock up equity value, such that even with several unexecuted bids or offers, the capital is there to satisfy them all. The worst case scenario of an options structure can be evaluated and appropriately margined pre trade.

But while mobile apps and electronic trading dominate the volume landscape, there are still plenty of other ways that capital is traded. Over the counter and manual orders are an important source of liquidity, and you can’t always block those pre-trade. Execution isn’t always atomic.

Even in a perfect world where margin scenarios are evaluated in real time, risks can explode in non linear and discontinuous manners. Shares that supported your overall equity one day might collapse in a gap down overnight, with no possibility to trade in between.

Margin is a buffer because of all these scenarios. The goal of the system can never be to prevent any violation, but rather to act as quickly and efficiently as possible when they do happen. It is far more reasonable to penalize accounts with actual risk on the table - regardless of size or trading activity.

This week was a win for retail traders because their on ramp to options trading knowledge had one more unnecessary barrier removed. But it was also a broader ecosystem win, because now margin requirements are better aimed at the real time stressors to capital.

The rule goes into effect in 45 days, and firms will have 18 months to implement internal monitoring systems. For most intents and purposes, there will be very little impact. But any step towards coherency is a good one, and it’s nice to see the rules keeping up with the market trends, even if it is a few steps behind.

Sake takes a little getting used to.

The highest compliment I heard at a recent event was “this tastes exactly like I think sake is supposed to.” Mingling around and trying different expressions back to back gives you rapid fire exposure to the nuances of the various different styles. In my uneducated opinion, most were pretty mediocre.

Unlike wine where region is the major delineating factor, in Japan sake can be produced anywhere. What separates the different grades of sake is how finely the rice kernels are milled before brewing.

Sake rice is a much larger grain than traditional eating rice, and for premium grades of sake less than half of the original kernel remains. The more pure the starch center, the better it will interact with the koji, which is a mold-like substance that converts grains into sugars that the yeast can then turn into alcohol.

Traditionally this practice is done with long poles by hand, kneading the mixture like a ball of bread dough. Thousands of different breweries dotted the landscape and for more than a millenia after its discovery, sake was a very local tradition. Yet as industry advanced, the twentieth century saw the number of breweries collapse from 5,000 to less than 1,000.

Now almost two thirds of the production is in the “ordinary” category, where there is no milling requirement and healthy doses of brewer’s alcohol are also added. The consolidation of the industry means that the top ten producers account for roughly 40% of the volume.

While that sounds stark, in the beer world it’s even more concentrated - AB InBev and Heineken produce 39% of the volume between just the two of them.

And while my beverage colleagues all raised eyebrows at this stat, neither of these hold a glass compared to the consolidation in the equity options market making space.

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The pictures of trading floors during their heyday are dotted with jackets of every color imaginable. A “local” could pull together a little bit of cash - as low as $50k - and find a backer who was willing to leverage their capital and take a percentage of the profits. Sole props provided a material contribution to the liquidity of large and small names alike.

Slowly individuals banded together. A couple of guys that trusted each other and wanted to hire a developer would form a trading group. Groups became firms who hired clerks and support staff. Firms became organizations that needed HR to police the unfettered raunchiness of instant messages and chat rooms.

Consolidation occurred at every stage, and now we have a half dozen highly specialized trading shops that dominate the dealer side of the trading world. Tens of thousands of customers come to the market every day, while only a handful of counterparties are there to take the other side.

There is nothing restricting an individual trader from gaining membership at an exchange and opening a relationship with a clearing firm. For the less administratively inclined, there are shops that specialize in this service, where a self backed market maker can stream quotes electronically and even raise their hand in open outcry.

But as with most things, it comes down to capital. It’s hard to build the flywheel of profitability and growth if you’re very constrained in what opportunities you can trade. Market making isn’t a prediction business, it’s a game of inventory management.

If someone is a good stock picker, they are on a fairly level playing field with the top names in that vertical. The $1,000 account compounds winners in very much the same way as a professional equities manager. It might be research desks versus message boards, but it’s basically the same game.

However market making is a business of providing liquidity to those who need it, and managing the risk of those positions. When a customer wants to trade a LEAP option that’s dated over a year in the future, the padding of all that uncertainty means there is often a solid amount of edge. But it takes a deep balance sheet to be able to warehouse that over the coming months, and a sole prop or even small shop might not want to take that on.

Even with near term options, the number of names that a smaller operation can trade is limited. While you’d always prefer that a buyer comes right after the seller of the same option, the flexibility to quote and price where there is trading opportunity is invaluable. Dealers can arbitrage time and space, but that requires deep pockets.

The evolving market structure is supported by and favors firms with very large footprints. As new exchanges spin up every few months, it not only takes development resources to wire up the connections, but there are ongoing expenses of membership and data feeds. Wholesalers who control the majority of retail orderflow are generally in favor of this as it creates new and different ways for them to process trades.

All of this sounds like a recipe for collusion. Which remains a very dirty word in the business, even though we’re 26 years past the infamous settlement with the Department of Justice. With fewer and fewer participants, don’t we land at oligopoly style pricing?

I would argue that the opposite is true. Because there are coordinated organizations with deep pockets, spreads get tighter and sizes get deeper because their economies of scale afford them the ability to offer better prices. With the regulatory backstops encouraging competition on auction orders and best price routing, even with only a few firms competing the customer ends up as the winner.

What a consolidation of firms does mean is a concentration of risk. There have been more conversations as of late about how all of this trickles down through clearing. Retail brokers have helped drive significant growth - particularly in short dated options - but the burden of funding the safety net at the OCC has fallen on other participants. And they’re looking to change that.

There’s a clearing risk when someone big goes belly up, but there are also operational risks to very large and significant participants. With each of these firms streaming billions of quotes, the smallest little error can have a ripple effect throughout the market. When Goldman Sachs was a large player they accidentally sent $1 orders in every security, roiling markets on the open and creating months of work to untangle all the “obvious” errors.

Consolidation also has some risks in terms of future industry direction. When the very largest participants have the ear of exchanges and regulators, they’re able to mold the landscape to favor their strengths. This could be a new crossing mechanism that favors initiators, or massaging the fee schedules to align with their routing preferences.

Most buy side traders get to benefit from consolidation however. While the risks are real, every single day price improvement and tighter spreads are very much the externality of the concentration of talent and capital in the market making community.

Dealers aren’t the only significant players in the market either. There are many participants who do just as much to provide liquidity and fair prices but don’t have the explicit registration status. Prices don’t stay in line because a market maker has a crystal ball about what skew or ATM vol should be - they move because orderflow drives them that way.

If you were on the floor of the CBOE or AMEX in the ‘90s, you’ll almost certainly be reminiscing about the good old days of trading elbow to elbow with several dozen of your frenemies in the pits. The spreads were a whole lot fatter, but volume was a lot thinner. There’s way more money sloshing around the listed options markets these days.

With art forms like sake or beer production, the decline of small operations is something to be concerned about. Craft processes benefit from small productions and the safeguarding of traditional techniques. It almost always produces a better product than the industrially brewed examples.

That’s not the case for traders and investors that use options. This is an industry where the concentration of expertise, combined with the deep pockets to manage inventory and spend on research and development delivers a decidedly better end product to the customer.

It’s nice to go to a place where everybody knows your name.

While it precludes me from ever having a working lunch again, there’s always an interesting conversation to be had. I’ll have to catch up on the Practitioner’s Guide to Volatility another time.

The other day we had a spirited conversation over appropriate wine tasting etiquette. There are several cues that a server gives to indicate they respect both the wine and the guest. Once you know these, the ritual is either pleasantly rote, or abominably sacrilegious.

Small details like reciting the year, region, and producer, or keeping the label constantly facing the guest demonstrate an awareness of the process. Dumping 5 oz straight into a glass to taste shows cluelessness.

The traditional rules of tasting suggest that one person owns the transaction from start to finish. Whoever makes the ordering decision is the one responsible for verifying receipt of the appropriate bottle.

It’s important to highlight that the objective of sampling the bottle of wine you ordered is not to provide notes and analysis. This is not a tasting for scoring or even deciding how much you like it. It’s simply a pass/fail of whether the bottle has any faults.

Because the exercise is more like signing for a package, it’s logical that only one Hancock is needed. However as customs evolve, tasting etiquette has changed too. Whether it’s for equal opportunity or to be inclusive, it’s become increasingly common to include both members of a two top in the process. That’s misunderstanding the point, and it’s wrong.

The folks down at my local are traditionalists, and agree with me. Obviously. But in the world of hospitality, even if the guest doesn’t know the reasons behind the practice, it’s a risky move to be exclusionary.

The erosion of small details like this really makes me dig in my heels. It makes me want to “stand athwart history yelling Stop.” There is a well orchestrated symphony taking place here, pipe down you animals.

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Whether or not you agree with this old man yelling on his porch, there’s no denying that customs and procedures exist for good reason. Every industry has its subtle protocols that at their most benign flag a rookie, and at worst cause unnecessary confusion and mistakes.

Buy for. Sell at. Buy for. Sell at. Over and over again we repeated that until it stuck in our heads. You learned these words before kindergarten, but as fresh faced college graduates we were told just how important it was to line up the prepositions.

So important that you could drop the buy and sell, and if you said “for”, someone knew you were bidding. “50 at 1.20” contractually puts you on the sell side in open outcry.

To this day it grinds me when I hear a real estate agent talking about putting in an offer. Or even with the correct verb, someone will place a bid at $1M. Shivers.

The underlying reason here is very practical. In a messy crowded pit with potentially several orders happening simultaneously, the economy of language is valuable. You want to be heard clearly and concisely - every additional word is another variable to get muddled. Verbal transactions are binding, and you don’t want to end up sorting this out in the breaks room later on.

In other cases imprecise language can just be confusing. Options have enough variables already, using non standard language pours sand into the mental machinery. Kris Abdelmessih pointed this out a few weeks back on Twitter - “Deep” is for ITM and “far” is for OTM.

If you tell me you want to sell the deep out of the money calls I’m going to scratch my head and we’re going to spend the next minute or two clarifying the strategy. I don’t totally know why, but it just seems logical that an option is deep because it’s up to its shoulders in intrinsic value, and it’s far because there’s only a small chance it gets hit. Something like that.

It’s not just the specific terminology that differentiates the insiders from the tourists - how you talk about trading or a position says a lot about your experience.

While it’s important to have a logic and expectation behind any trade you make, the more focused a risk taker gets on specific scenarios and theses the more suspect I become. Savvy investors recognize that the future is a tapestry of outcomes, and a good portfolio is robust against the predictable and the unknowable. Trading is an exercise in resilience, not fortune telling.

Framing market makers as anything other than liquidity providers shows you know as much about market plumbing as I know about the pipes inside my walls. Dealers don’t care about direction, and aren’t pushing the stock against you. They’re rarely forced to do anything, and the only thing that sets price is orderflow.

These linguistics ticks are the equivalent of not properly reciting the appellation or bringing the bottle to a separate corner to pop the cork. What really botches the tasting is when the wine gets overserved. When amateurs think the point of the ritual is glug glug.

It’s far too common for traders to come to the options market expecting alchemy. Consider yourself warned - options trading doesn’t make money.

Derivatives are built for risk transfer. They’re contracts to mitigate or enhance a natural exposure. The farmer that sells future contracts, or the multinational that buys currency forwards.

The framing of a strategy as an income generator is a red flag. Even when you drop in ten dollar phrases like variance risk premium harvesting, it doesn’t turn a basic strategy into a revenue generator. Expecting anything more than a few marginal percentage points of return says you’re drinking just for the buzz.

There are edges and opportunities in options - markets aren’t efficient for risk transfer participants without the hard work of pricing sleuths. But there’s a very specific time and a place for that, and it comes from a lot of hard work. There are no tea leaves or dealer positions to read, just prices and outcomes.

When tasting that newly presented bottle of wine, the objective is binary - pass or fail. Anything more from either the server or the guest shows they fail to understand the basic point. It’s tempting to bow to the naive demands of guests expecting that everyone gets a taste, or to retail traders that just want stock picks and dividend checks.

But whether you’re in wine service or options markets, the standard practice has developed for a good reason. Using the right language, and understanding the framing of the situation is what separates the amateurs from the experienced.

And with that basic test out of the way, it opens a whole world of potential conversations about bottles and markets alike.