I don't have a particular picture in mind. The idea is actually well articulated in Taleb's skin in the game which is superficially about alignment and really about selection effects and evolution. Diversity is the fuel for evolution. Royals marrying each other is...well you get the point
Great article, Kris - connection between optionality and radical creativity/alien solutions was really thought provoking. Can I ask a something to help me understand this sentence a bit better:
“As a matter of evolution and progress, we are long vol — we discard what doesn’t work and retain what does which is how an option works — options benefit from variance…”
I was wondering what the model of being long vol was that you had in mind. At first I thought it was like being long a call option in life, or the life of a civilization (we all want the line to go up and to the right, preferably quickly rather than slowly) and the discard/retain contrast was like losing/gaining deltas (a bit like with stock replacement). So long upwards vol basically. But then it also seemed like you might have in mind eg buying teenies on potential ideas/solutions and looking for big moves to deliver convex wins that were much bigger than your many small losers, with no particular upward or downward bias (teeny puts like an alien solution that helps you get a big pay off from showing how to reject or do without something, say). So then the discard/retain contrast was like ignoring small losers to retain big winners. Really interesting connection, just wanted to ask if you had a particular intuitive picture of the optionality in mind that you were alluding to.
Thanks Kris - your link made it clear. I faked myself out with my choice of language: If I had used the term variance (more precise) rather than variation (less precise), it would have triggered me to think that vol is the square root of variance. Thanks again!
Great video on hedge ratio & idio. Really like the trader insights - like over-hedging the delta if you think your counter party is knowledgeable and likely to be right!
Despite the clarity of your video, I find myself confused on one point. The formula for idio is unintuitive to me. The r squared for a regression is the proportion of variation in the dependent variable that is "explained" by the independent variable. So, it seems like the unexplained portion - the idio - would simply be 1 - r squared (and not the square root of (1- r squared).
Numerically, if r squared were 60%, then the idio feels like it should be 40% and not 63% (sq root of 1- 0.6). What am I missing? Any help with the intuition would be greatly appreciated. Thanks.
I don't have a particular picture in mind. The idea is actually well articulated in Taleb's skin in the game which is superficially about alignment and really about selection effects and evolution. Diversity is the fuel for evolution. Royals marrying each other is...well you get the point
Makes sense, thanks 👍
Great article, Kris - connection between optionality and radical creativity/alien solutions was really thought provoking. Can I ask a something to help me understand this sentence a bit better:
“As a matter of evolution and progress, we are long vol — we discard what doesn’t work and retain what does which is how an option works — options benefit from variance…”
I was wondering what the model of being long vol was that you had in mind. At first I thought it was like being long a call option in life, or the life of a civilization (we all want the line to go up and to the right, preferably quickly rather than slowly) and the discard/retain contrast was like losing/gaining deltas (a bit like with stock replacement). So long upwards vol basically. But then it also seemed like you might have in mind eg buying teenies on potential ideas/solutions and looking for big moves to deliver convex wins that were much bigger than your many small losers, with no particular upward or downward bias (teeny puts like an alien solution that helps you get a big pay off from showing how to reject or do without something, say). So then the discard/retain contrast was like ignoring small losers to retain big winners. Really interesting connection, just wanted to ask if you had a particular intuitive picture of the optionality in mind that you were alluding to.
The derivation is in here I believe
https://moontowermeta.com/from-capm-to-hedging/
Thanks Kris - your link made it clear. I faked myself out with my choice of language: If I had used the term variance (more precise) rather than variation (less precise), it would have triggered me to think that vol is the square root of variance. Thanks again!
Great video on hedge ratio & idio. Really like the trader insights - like over-hedging the delta if you think your counter party is knowledgeable and likely to be right!
Despite the clarity of your video, I find myself confused on one point. The formula for idio is unintuitive to me. The r squared for a regression is the proportion of variation in the dependent variable that is "explained" by the independent variable. So, it seems like the unexplained portion - the idio - would simply be 1 - r squared (and not the square root of (1- r squared).
Numerically, if r squared were 60%, then the idio feels like it should be 40% and not 63% (sq root of 1- 0.6). What am I missing? Any help with the intuition would be greatly appreciated. Thanks.
this post will help
https://blog.moontower.ai/from-capm-to-hedging/